Ticker: DIS
Sector: Consumer Services
Industry: Media & Entertainment
Recommendation: HOLD
Pricing
Closing Price: $29.40 (10/16/09)
52-week high: $29.52 (10/16/09)
52-week low: $15.14 (03/09/09)
Market Data
Market Cap
Total Assets
Total Liabilities
Total CA
Total CL
Trading Vol.
Valuation
EPS (ttm)
P/E (ttm)
P/Sales
P/FCF
P/Book
Div Yield
$53.23B
$62.58B
$28.29B
$11.50B
$8.61B
13.33M (3 mo avg)
RECOMMENDATION
$1.69
17.41
1.49
18.91
1.52
1.22%
Profitability & Effectiveness (ttm)
ROA
5.53%
ROE
9.46%
ROI
6.65%
Profit Margin
9.61%
Operating Margin 15.07%
Financial Strength
Quick Ratio
1.19
Current Ratio
1.34
I recommend that we HOLD our 1,000 shares of
Disney. The bottom line on the company is that it
is very reactionary to the state of the economy. In
good economic times money flows more freely
and Mickey is happy. In bad economic times the
reverse is true. If we are in the beginning stages of
a recovery, it is likely that there are more happy
times ahead for Disney. If we stumble into a
double dip recession, then the road becomes a bit
bumpier. Having said that, Disney is a very solid
company and has proven through its existence
that it knows how to make money. However, it is
overvalued at its current price and we should not
consider buying more shares. To sum, it is a buy
stock at a hold price.
COMPANY OVERVIEW
Analyst: Kevin Sanford
Email: ktsqmb@mail.missouri.edu
Walt Disney was founded in 1923 in the town of
Burbank, California (Walt Disney). At first it was
just a movie studio, releasing the company’s iconic
character Mickey Mouse five years after its
inception. In 1955, the company’s first theme
park, Disneyland, was introduced. Since then,
Disney has continued to expand into its current
position as a leading media and entertainment
conglomerate. American’s and others alike have
grown accustomed to the fixating characters and
1
enchanting stories Walt Disney creations often embellish. With the increased size
the company has enjoyed comes more employees, a number that has now reached
150,000 worldwide (Mergent Online). 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.
BUSINESS SEGMENTS AND PERFORMANCE
Media Networks (42.7% of 2008 Revenues, 56.2% of operating profits)
The Media Networks segment is responsible for the television, Internet and radio
media industries. The biggest player in the television area is American Broadcasting
Company (ABC). However, they have several other successful networks, namely
ESPN, Walt Disney Television, and SOAPnet. Disney also holds large ownership
amounts in Lifetime and A&E. The Internet Group is in charge of running the
websites for many of the company’s media networks. The only area that has been
lagging is the radio segment, which should be no surprise as using radio as a source
of media has been decreasing for many years. Due to the lagging nature of the
business, Disney recently sold ABC Radio Network to Citadel Broadcasting. ABC
Radio Network was one of its biggest stations, however they do still own 46 other
radio stations across the country and the world (Reuters). Total revenues increased
by a respectable 7 percent on the year.
It is important to note that Walt Disney’s fiscal year ends September 27th, 2009.
Therefore, the most recently quarterly report was actually their 3rd quarter report,
rather than 2nd.
Thus far, fiscal year 2009 has brought a slight increase in revenues for the Media
Networks segment. At the end of the 3rd quarter, it accounted for 43.7% of the
company’s revenues. Walt Disney’s dependence on the segment’s profits has
increased dramatically, however. The segment’s operating profits have increased
up to 68.1%, partly due to the addition of the Interactive Media segment and its net
losses. The segment has a fiscal year 2009 profit margin of a very robust 28.6%.
Disney breaks the company’s revenues in this segment down into two areas: cable
networks and broadcasting, with cable networks accounting for 63% of the
segment’s revenues in FY09.
Parks and Resorts (30.4% of 2008 revenues, 22.4% 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. This has been in area in which the company has been trying to
expand. They recently completed the Hong Kong Disneyland (2005) to gain
exposure in China and will also build two new cruise ships, which are 50% larger
than the old ones (Reuters). Total revenues increased by a solid 8% on the year.
2
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. People have had less
disposable income, therefore expensive vacations like ones to Disney’s theme parks
have become less attractive.
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. Therefore, this is usually a very good
time for Disney’s parks and resorts.
Thus far, fiscal year 2009 has brought a very slight decrease in percentage of
company revenues, down to 29.8%. Operating profits have been very flat, moving
downward just a pinch to 22.3%. FY09 profit margin for the segment is a healthy
13.7%.
Studio Entertainment (19.4% of 2008 revenues, 12.8% of operating profits)
This is likely the first segment that comes to mind when people think of Walt Disney.
It is also the most variable in terms of both revenues and profit generation.
Basically, the segment’s performance is driven completely on its ability to create hit
movies. A dud can derail revenues and profits where a hit movie like Pirates of the
Caribbean can significantly bolster the segment’s revenues and profits (Reuters).
Total revenues decreased by 2% in 2008.
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
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 has accounted for 17.7% of the company’s
revenues so far in FY09, a relatively significant drop off from the 19.4% from FY08.
The segment is on pace to again suffer a total revenue decrease, perhaps indicating
why the decision was made to fire Mr. Cook. Or maybe it is because the segment’s
contribution to the company’s operating profits is currently a meager 3.9%. The
segment’s profit margin so far in FY09 is also very underwhelming, at 4.1%. The
lack of profitability can be greatly attributed to the overall turmoil within the
segment.
Consumer Products (7.6% of 2008 revenues, 8.5% 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 include are very diverse, ranging from toys and apparel to home décor
and electronics. Historically, the revenues from this segment have come from
licensing the Disney brand to other manufacturers, however the company has
recently been expanded into manufacturing its own products (Reuters). This was
3
the company’s fastest growing business segment, with total revenues increasing
26% in FY2008.
Consumer Products as a percentage of company revenues has decreased so far in
2009 to 6.8% of total revenues. However, it will still likely have an overall increase
on the year. Operating profits have actually increased to 9.5% despite the decrease
in revenues. The segment has demonstrated great profitability, with a profit margin
currently running at 25.7%.
Interactive Media (Created in June of 2009)
Disney created a new division called Interactive Media that is focused on overseeing
several new online assets that the company acquired in early June, as well the
development of its video game business. These online assets make up a new
business area called Disney Online, and they include: Kaboose.com, BabyZone.com
and 6 others totaling $18 million. The main audience for Disney Online is young
mothers, citing that mothers make most of the household purchasing
determinations (Reuters).
One of the largest current programs in this segment is the $350 million investment
Disney made in developing its video game business. In July of 2009, the company
announced its plan to launch eight mobile games for the iPhone, Android,
Blackberry, and Java/Brew, in an attempt to break into the mobile gaming market.
As previously noted, the segment is very new; therefore there is not much
information on its earnings. So far, the division has amassed 555 million in total
revenues, accounting for 2.1% of the company’s total FY09 revenues. Like most
other start-ups, the division is finding it hard to turn a profit thus far, suffering a net
loss of 181 million in its short existence.
4
HISTORICAL SEGMENT REVENUES
09/27/20
08
USD
Thousan
ds
16,116,0
00
11,504,0
00
7,167,00
0
3,056,00
0
37,843,0
00
Report Date
Currency
Scale
Media Networks
Parks & Resorts
Studio Entertainment
Consumer Products
Total
09/29/20
07
USD
Thousan
ds
15,046,0
00
10,626,0
00
7,308,00
0
2,530,00
0
35,510,0
00
Revenues
09/30/20
06
USD
Thousan
ds
14,638,0
00
9,925,00
0
7,529,00
0
2,193,00
0
34,285,0
00
10/01/20
05
USD
Thousan
ds
13,207,0
00
9,023,00
0
7,587,00
0
2,127,00
0
31,944,0
00
09/30/20
04
USD
Thousan
ds
11,778,0
00
7,750,00
0
8,713,00
0
2,511,00
0
30,752,0
00
As the table demonstrates, revenues have been increasing pretty steadily in most
business segments outside of Studio Entertainment, and the slight dip in 2005 and
2006 for Consumer Products. Operating profits in these areas have painted a
similar picture, with Media Networks operating profits increasing over 100% in this
time frame. The only discrepancy with these segments operating profits is that
while Studio Entertainment’s revenues have been decreasing, there operating
profits have been increasing during this time period. However that trend appears to
be over with the segment’s performance in the first three quarters of fiscal year
2009. The losses in operating income appear to be the result of decreases in
worldwide home entertainment and worldwide television distribution.
GEOGRAPHIC REVENUE BREAKDOWN
Geographic Analysis
Revenues
Report
Date
Currency
Scale
United
States &
Canada
Europe
Asia Pacific
Latin
America &
Other
Total
Operating Income
09/27/2008
09/29/2007
09/30/2006
09/27/2008
09/29/2007
09/30/2006
USD
Thousand
s
USD
Thousand
s
USD
Thousand
s
USD
USD
Thousand
s
USD
28,506,000
27,286,000
26,565,000
6,472,000
6,042,000
4,938,000
6,805,000
1,811,000
5,898,000
1,732,000
5,266,000
1,917,000
1,423,000
386,000
1,192,000
437,000
918,000
542,000
721,000
594,000
537,000
175,000
156,000
93,000
37,843,000
35,510,000
34,285,000
8,456,000
7,827,000
6,491,000
Thousands
5
Thousands
The 2008 geographic revenue breakdown is as follows: US/Canada : 75.2%, Europe:
18%, Asia Pacific: 4.8%, and Latin America, Other: 1.9%. The three year trend
seems to indicate that dependency on revenues from the U.S. and Canada is
moderately declining, while other areas, specifically Europe, are increasing their
share of the pie (15.4% in 06 to 18% in 08).
The 2008 geographic operating profit breakdown looks very similar: US/Canada:
76.5%, Europe: 16.8%, Asia Pacific: 4.6%, Latin America/Other: 2.1%. Profit
margins for each region were very strong, at over 20% a piece. Latin America, while
being the smallest proved to be the most profitable business area with profit
margins nearing 25%.
FY 09 OVERALL
It appears that the company’s total revenues are due for a bit of a decrease in FY09.
This is based off comparing YoY revenue numbers at the end of the 3rd quarter. The
reason for this is contractions in each of their business segments outside of
Consumer Products, which is actually faring slightly better (S&P). Also, we will
likely see a substantial margin contraction due in part to advertisement weakness,
relatively aggressive promotions at its theme parks, higher programming costs in
the broadcasting area, and larger investments in new media and video game
development.
INDUSTRY OUTLOOK
Walt Disney, like other conglomerates, operates in many different types of
businesses. Therefore, an analysis should be conducted on each of the industry’s
Walt Disney’s businesses operate in, and specifically the companies that Disney
owns.
Media Networks has become the most important segment for this company,
generating over half of their 2008 operating profits. While the segment as a whole
appears to be struggling with lower advertising revenues, decreasing profit margins,
and need to consolidate, Disney is pretty well positioned to experience further
success. By far the most important holding within this segment is ESPN, which
accounts for roughly 75% of the network sales (Morningstar). ESPN has a very
strong competitive position, completely dominating domestic sports television
through its programming on ESPN, ESPN2 and its growing number of sister stations.
ESPN has two major sources of revenue: affiliate fees from the 98 million
households that receive ESPN via cable, satellite, or telecom providers, and
advertising (Morningstar). This puts ESPN at a major advantage because most of its
competitors primarily only receive ad revenue. There do not appear to be any
company’s ready to step up and challenge ESPN’s throne to king of the sports world.
ESPN has in place very lengthy contacts with many sports leagues, which make it
very possible for any competitors to overcome. The only thing can could interfere
with their business is league’s becoming fearful of ESPN’s power.
6
Like ESPN, the Disney Channel is also in a very good position. Their only significant
competition in pay TV is Nickelodeon, and Disney appears to have an advantage due
to their combination of internally generated hits like Hannah Montana along with
their extensive list of feature films and animated characters (Morningstar).
Parks and Resorts is an area where Disney offers an extremely unique product that
is almost impossible to duplicate. As one might expect, the business did take a hit
during the recession, but it also should rebound quite well as the economy picks
back up and consumers start digging into their wallets again. Disney did a very
good job of managing this segment during the recession by offering substantial hotel
discounts to keep attendance and occupancy rates high (Morningstar). This area
was still extremely popular right before the recession hit, and I do not see why that
wouldn’t continue for years to come.
Studio Entertainment is a very uncertain area for the company. There are plenty
of potential negatives out there, namely in DVD sales (or lack thereof) which could
have a long lasting affect on the profitability of all Studio Entertainment firms.
However, Disney appears to be well positioned in the movie making business,
especially after its recent acquisition of Marvel Entertainment. Adding Marvel and
Pixar (2006) increase what was already a huge library of filmable material that
helps reduce the risk involved in making movies (Morningstar). Marvel has had a
number of hits over the past few years (Spiderman, Ironman), which can really
carry the segment much like a string of duds can sink it.
Consumer Products success, much like Disney’s theme parks and, to an extent, its
TV networks, is based on the health of the economy. In a strong economy, this
segment should do well. In a weak economy, it will likely struggle. If we are in the
midst of a recovery, this segment should be one of the major benefactors. Also, this
segment’s success is positively correlated to the success of the firm’s movies.
Popular characters in the films lead to popular items to license out as products. It
should also be noted that this segment typically does best in the 1st quarter due to
the effect of holiday shopping.
Interactive Media will be an interesting segment to watch. The company is making
a very large investment in video game development and this will be the segment
that is most affected by that investment. Reports conclude that the video game
industry is one that is growing very rapidly. It is unlikely that this segment will have
much of an impact in the near future but it is certainly one to keep an eye on.
RELATIVE VALUATION
Disney has many competitors across a wide spectrum of businesses. Their two most
relevant competitors are Time Warner and Comcast, due to their involvement in the
Media Networks segment. Time Warner is bit more relevant, because they also have
a filmed entertainment division. Obviously, there are some key differences between
the companies, so therefore this valuation should be taken with a grain of salt.
7
Metric
DIS
TWX
CMCSA
P/E
17.41
--
15.53
EPS
$1.69
-$11.60
$1.00
EPS Growth (5
year)
28.62
--
--
.35
.89
.75
Current Ratio
1.01
1.19
.42
Gross Margin
15.55
41.60
60.42
Profit Margin
9.61
-36.58
8.27
LT D/E
Sales Growth
(5 year)
6.94
3.53
5-YEAR STOCK PERFORMANCE
8
13.30
YEAR TO DATE STOCK PERFORMANCE
Both historically and year to date Disney has performed well against its competition
and against the broader market. Disney has rebounded quite well off the March
lows, steadily keeping up with the S&P and appreciating substantially more than
Time Warner or Comcast. The appreciation is in the midst of relatively poor
earnings data, so one could expect the increases to be even more substantial the
farther along we get in the recovery.
INTRINSIC VALUATION
I used the Warren Buffett Owner Earning’s model for the intrinsic valuation. The
beta of 1.01 was found by computing the average from four different financial
sources. The three-month treasury rate is .07. The historical market return rate is
11%.
CAPM = .07 + 1.01(11-.07) = 11.1
In order to make my model more conservative, I added .9 to get to 12%. The growth
rate for 2010-2011 is based off a slow economic recovery, in which Disney’s growth
will lag behind its historical average. The 2013 and on growth rates represent more
traditional company sales growth. I used a residual growth rate of 3% just because
it is a conservative number and it is hard to predict where a company will be 10
years in the future. The model will be posted separately. According to the model’s
results, Disney is overvalued, which isn’t a surprise considering it’s currently
trading at its 52 week high.
9
SENSITIVITY ANALYSIS
Discount Rates
14%
12%
10%
8%
4%
$18.05
$21.74
$27.57
$38.15
6%
$19.44
$23.54
$30.05
$41.89
8%
$20.96
$25.51
$32.77
$45.98
10%
$22.60
$27.66
$35.72
$50.44
The sensitivity analysis holds the 2010 and 2011 growth rates constant at 4%, and
the residual rate at 3%.
RISKS TO THE COMPANY
Decreasing Advertisement Revenues
While Disney has an advantage over most Media firms because a lot of their revenue
comes from affiliate fees, the volatility in advertisement revenues can still
significantly impact their business. For example, a disappointing sports season can
lower the impact the playoff season has on the company’s revenues. Also, if viewers
find something better to watch than Grey’s Anatomy or Desperate Housewives (ABC),
advertisers will not be willing to pay as much to get their ads on those shows.
Changes in Media Technology
As mentioned earlier, there has been a significant change in the way companies
advertise. Internet advertising is becoming more and more popular, with Internet
ad revenues increasing over 25% annually. Therefore, media conglomerates like
Disney have been forced to adapt so that they don’t miss out on major ad revenues.
Disney is already doing so, by posting full videos and video clips on ABC.com,
ESPN.com, and also Disney.com. Disney also now sells ABC content for use on
iTunes and video iPods (Walt Disney). While there is considerable opportunity,
there is also considerable risk because it is changing the landscape of the entire
industry.
10
Piracy/Lack of Movie Attendance
The combination of piracy, online video and a bad recession has led to stagnant
growth in movie attendance. If this continues the company will have to find a way
to make this segment more profitable.
Declining DVD Sales
Declining DVD sales (2% in 2008) have not impacted Disney as much as it has other
companies, mainly because Disney’s main audience (kids) has not seen the
decreases other age groups have.
Tourism Related Assets
Tourism related assets, like the company’s parks and resorts, are subject to
economic downturns. However, there is also substantial opportunity in this area
because a weakening dollar, especially against the Euro, means it is more affordable
for foreigners to visit the country.
SOURCES
Forbes.com
Businessweek.com
Walt Disney
S&P Net Advantage
Mergent Online
Bigcharts.com
Google Finance
Yahoo Finance
Reuters
Morningstar
11
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