Ticker: DIS
Sector: Consumer Services
Industry: Media & Entertainment
Recommendation: HOLD
Pricing
Closing Price: $30.07 (02/15/10)
52-week high: $32.75 (01/04/10)
52-week low: $15.14 (03/10/09)
Market Data
Market Cap
Total Assets
Total Liabilities
Total CA
Total CL
Trading Vol.
avg)
Valuation
EPS (ttm)
P/E (ttm)
P/Sales
P/Book
Div Yield
$58.32B
$69.31B
$33.13B
$12.95B
$11.67B
12.75M (3 mo
$1.76
17.13
1.61
1.62
1.17%
Profitability & Effectiveness (ttm)
ROA
5.75%
ROE
10.01%
ROI
7.07%
Profit Margin
9.98%
Operating Margin 15.65%
Financial Strength
Quick Ratio
1.31
Current Ratio
1.33
Analyst: Alex Brandon
Email: ambtx2@mail.missouri.edu
RECOMMENDATION
As an entertainment company, Disney’s
performance is highly dependent to the state of
the economy. Thus, similar to the stock market
as a whole, the company’s stock value has
rebounded from the lows experienced last year
as the United States economy emerged from its
deep recession. However, while the stock has
experienced strong growth over the past 12
months, the outlook for Disney is uncertain.
Thus, my current recommendation is that we
hold our 1,000 shares.
COMPANY OVERVIEW
The Walt Disney Company (“Disney” or the
“Company”) was founded in 1923 in the town of
Burbank, California and operates as a diversified
entertainment company. The Company’s first
them park, Disneyland, was introduced in 1955.
Today, the Company employs 144,000
employees and operates within five business
segments: Media Networks, Parks and Resorts,
Studio Entertainment, Consumer Products and
Interactive Media. Included in its leading
international family entertainment and media
enterprise are five business segments: media
networks, parks and resorts, studio
entertainment, consumer products and the
newly created Interactive Media.
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BUSINESS SEGMENTS AND PERFORMANCE
Media Networks (45.1% of 2009 Revenues, 71.4% of operating profits)
The Media Networks segment is responsible for the television, Internet and radio
media industries. The Company runs a number of successful media networks
including ABC, ESPN, Walt Disney Television, and SOAPnet. Disney also holds large
equity stakes in Lifetime and A&E. The Internet Group operates websites for many
of the company’s media networks.
Disney breaks the company’s revenues in this segment down into two areas: cable
networks and broadcasting. In 2009, the Company achieved growth of 5% in cable
networks revenue and 3% in cable networks operating profit. Also, in 2009, Disney
had negative 3% growth in broadcasting revenue and negative 40% growth in
broadcasting operating profit. The decline in broadcasting revenue was the result of
decreased advertising revenue, while the large dip in profitability was the result of a
bad debt charge and increased programming and production costs.
Parks and Resorts (23.5% of 2009 revenues, 21.3% of operating profits)
As the name states, this segment deals mainly with the operation of Disney’s theme
parks and resort, both in the U.S. and internationally. It also includes the Disney
Cruise Line, which provides cruises from Florida to a private island called Castaway
Cay in the Bahamas. Disney plans to expand its cruise sub-segment by adding two
new ships to its fleet in the next two years.
Parks and Resorts revenue decreased 7%, or $837 million, in 2009. The decline in
segment revenue was the result of decreased domestic and international spending
and unfavorable currency translation from international park operations.
Prior to the financial crisis, this segment was one of the company’s leading drivers of
growth. In fact, 2006 brought a record setting number of visitors to Disney’s theme
parks. The recent recession, however, has hurt this segment.
This segment, typically, is reactionary to the state of the dollar. When the dollar is
weak, foreign travelers have more incentive to visit the country and U.S. citizens
have more incentive to stay in the country. As a result, the strengthening of the U.S.
dollar has negatively impacted Disney.
Studio Entertainment (17.0% of 2009 revenues, 2.6% of operating profits)
The Studio Entertainment segment produces and acquires motion pictures, directto-video content, musical recordings and live stage plays. The segment’s
performance is driven completely on its ability to create and acquire hit movies.
There has been some recent turmoil in this business area. This September, CEO
Robert Iger forced Disney Studios Chairman Dick Cook to resign citing poor
direction and poor performance (Forbes). Also, just a couple weeks ago Disney
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announced they would cut the staff at its Miramax Films label by 70% while
reducing the number of Miramax films per year to three.
The Studio Entertainment segment saw revenues decline by 16% in 2009 due to
decreases in worldwide home entertainment, music distribution and worldwide
television distribution. The decline in Studio Entertainment was the result of lower
unit sales and lower net effective pricing.
Consumer Products (6.7% of 2009 revenues, 9.1% of operating profits)
The Consumer Products segment is in charge of licensing out the Disney brand
name, its characters, etc and also tracking the Disney Store retail chain. Products in
this segment are very diverse, ranging from toys and apparel to home décor and
electronics.
Consumer Products revenues were mostly flat at $2.4 billion in 2009. Revenue
increases in Disney’s retail business were offset by decreases in merchandise
licensing and publishing. It should be noted that while revenues remained flat for
2009, costs and expenses increased 11% during that same period. The increase was
primarily the result of the acquisition of Disney Stores North America in the 3rd
quarter of 2008.
Interactive Media (2.0% of 2009 revenues, -4.4% of operating profits)
The Interactive Media Group creates and delivers Disney-branded entertainment
and lifestyle content across interactive media platforms. These platforms include
video games and Disney Online.
Interactive Media revenues decreased 1% as a result of lower video game sales and
decreased licensing revenues. Costs increased slightly due to higher video game
unit costs, higher music royalties and higher expenses at the Company’s mobile
phone service business in Japan.
HISTORICAL SEGMENT REVENUES
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As the table demonstrates, Media Networks revenue has increased steadily over the
last three years. The other four segments experienced negative or no growth from
2008 to 2009. Operating profits in these areas have painted a similar picture, with
all segments experiencing negative growth from 2008 to 2009.
GEOGRAPHIC REVENUE BREAKDOWN
The 2009 geographic revenue breakdown is as follows: US/Canada: 76.1%, Europe:
16.6%, Asia Pacific: 5.1%, and Latin America, Other: 2.1%. Based on the chart
above, Disney is expanding its presence in the Asia Pacific and Latin America
regions. While the two regions combined only make up 7.2% of the Company’s
2009 revenue, it shows that the company is successfully expanding the operations.
RELATIVE VALUATION
Disney has many competitors across a wide spectrum of businesses. Their two most
relevant competitors are Time Warner and CBS Corporation, due to their
involvement in the Media Networks segment. Time Warner is bit more relevant,
because they also have a filmed entertainment division.
As you can see, Disney’s stats are well within the industry ranges. The Company’s
EPS are equal to or better than its closest competitors. In addition, the Company is
the largest in the industry based on market capitalization.
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STOCK PERFORMANCE
5-Year Chart
1-Year Chart
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6-Month Chart
Against the benchmark S&P 500 index and competitors, Disney has held its own
over both the short-term and long-term. Disney has rebounded quite well off the
March lows, steadily outperforming the S&P.
INTRINSIC VALUATION
I completed a discounted cash flow analysis, which estimated the present value of
the Company’s future cash flows. Using a beta of 1.13, a risk free rate of 3.72% (10Year Treasury Rate) and a historical market return rate of 11%, the return on equity
is calculated as follows:
CAPM = 3.72% + 1.13 (11.00% - 3.72%) = 11.95%
While the CAPM model presents a discount rate of 11.95%, I believe a discount rate
of 10% is more appropriate. I ran three models with growth rates for years 1-10
ranging from 4% in a conservative case to 6% for a more aggressive case. My base
case utilized a growth rate of 5% for years 1-10. My residual growth rate is
estimated to be 3% for all three cases. Based on my analysis, I calculated a value
range of approximately $28-$33 per share for The Walt Disney Company. At the
time of the analysis, the Company’s shares were trading at $30.07, which is well
within my projected range.
CONCLUSION
Based on the above analysis, I believe that The Walt Disney Company is currently
trading at the appropriate level. As a result, I recommend that we hold our 1,000
shares of Disney.
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SOURCES
Walt Disney 10-K
Bigcharts.com
Google Finance
Yahoo Finance
DCF spreadsheet includes historical financials, DCF analyses, industry data and
more.
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