Company Valuation Project
The Walt Disney
Company
Fai Al Khalifa, Olivia Chin, Haolin Guo, & Sophia Hinds
COMPANY DESCRIPTION
The Walt Disney Company was created on October 16th, 1923 as a contract
between Walt Disney and M.J. Winkler. This venture was referred to as The Disney
Brothers Studio. From its beginnings as a cartoon and animation studio, The Walt
Disney Company has grown into a multinational empire. The Walt Disney Company
has delivered an incomparable entertainment experience for people of all ages.
Disney is now the largest entertainment company in the world, consisting of five
business segments which include: media networks, parks and resorts, studio
entertainment, consumer products, and interactive. Additionally, the company’s
globally known consumer brands include: Disney, ABC, ESPN, Pixar, Marvel, and
LucasFilms. The Walt Disney Corporation has created a phenomenal empire in the
entertainment industry and it continues to strive for high quality production to keep
up with its legacy.
SWOT Analysis
Strengths
The Walt Disney Company has many strengths, the most important being the brand
itself. The Walt Disney Company is known as a leader in family entertainment, and
has been around for more than 90 years. It was rated the 14th most valuable brand
in 2013. Another strength is its breadth: Disney is a leader not only in movies and
television, but in the theme park industry and consumer segment as well. Disney’s
extensions into all of these categories make it easier to grow its already large
customer base.
Weaknesses
Disney has several weaknesses. First of all, the Walt Disney Company has high
operating costs. In addition to their exceptionally high sunk costs, there is the
continual cost of updating all the parks, resorts, hotels, cruise ships, etc. Secondly,
Disney heavily depends on US and Canadian markets for its income even though it
operates in more than 200 countries. More than 70% of the business revenues come
from US alone. The third weakness is Disney’s frequent change in management.
Regularly changing a company’s management can hinder a company’s growth.
Though it does not seem as though Disney is slowing down in any respect, it does
create a lack of consistency in how the company is managed. In the long run, this can
lead to operational problems. Fourthly Disney had a limited range of target audience
of mainly children. Furthermore, The Walt Disney Company is the largest
entertainment provider in the world and has become so due to acquisition of
competitors. This means the size of Disney’s business has become a concern for the
government due to significant market concentration and the fact that the company
has very few opportunities to acquire competitors. Finally, the decline of DVD
market is also a factor that can slow down revenues.
Opportunities
Disney has many business opportunities within its sectors as well as new endeavors.
Not only can they expand and grow within the entertainment industry, they can
market their brand name into new technology and resources. They are extremely
established within the entertainment industry with their theme parks and movies.
Their brand name has the most potential opportunity based on the universal
recognition. Disney currently has nine applications for iPhone including park maps,
dining information and park ride wait times. Applications for androids are also
available with “Mobile Magic” resort guides. All these applications are only rated a 3
out of 5 star at best. With the cell phone market being so prevalent there is
definitely room to improve their mobile applications in addition to adding new ones.
Disney also currently has a Disney Princess line at Sephora makeup stores. Released
in 2011, it began with Princess Jasmine and had a makeup palette and perfume. This
is a perfect example of Disney expanding their brand name to a different, more
mature audience. Disney already caters to a young crowd, and by releasing a
makeup line to an older audience it gives them an opportunity to expand the brand
name to different age groups. New markets for an older crowd is a definite
opportunity for Disney to create more revenue and a more wide spread acceptance
of the brand.
Threats
Although Disney is a major part of the entertainment industry, there still is intense
competition. Disney faces competition in entertainment, media, parks and resorts,
and tourism. One problem Disney faces is its lack of activity online, whereas new
businesses and competitors use the Internet as a platform to expand and grow.
Disney suffers because of the growth of the online TV and online movie rental
industries. Subscription to Netflix or Huluplus and other movie rental websites cost
much less than cable TV and DVDs. Internet infrastructure is not an industry that
Disney has much momentum in, and thus other companies are taking more power in
this field.
Also, technology has developed so much since the start of Disney. Some
technological advancements now allow copying and distributing copyrighted
material faster and more easily. This poses a threat to Disney’s income since now
people can watch movies online for free, and as a result fewer people are going to
watch movies in cinemas or buy DVDs. Disney’s resorts also face much competition
from companies who can offer better vacations, or alternative vacations that Disney
does not offer. This means Disney needs to work extra hard on advertisement and
on vacation packages, as well as on creating attractive vacations that are one of a
kind in the tourism industry in order to have a greater competitive advantage.
Main Value Drivers:
1) ESPN - represents 28% of Disney's stock value
ESPN is one of the leading sports channel. It has rights to show NFL, NBA, and the
FIFA World Cup. Subscription fees and advertising allows ESPN to generate revenue.
2) Disney Channel, A&E & Others - 21%
Those are other channels owned by the company which include: Disney Channel,
A&E, History Channel, and Lifetime. The TV channels make money through
subscription and advertisement.
3) Disney Studios - 19%
Disney Studios produces movies through Walt Disney Pictures, Touchstone Pictures,
Hollywood Pictures, Pixar, Miramax, and Hollywood banners. The main revenues
from this business are DVD sales, content licensing, and box office sales.
4) ABC Broadcasting - 12%
The ABC Television Network is one of the big four broadcasting networks in the
United States. ABC makes its revenue from selling advertising slots and through the
licensing of its productions.
Walt Disney have had innovative leaders, “Van France took Walt Disney’s
lead by relentlessly focusing on being innovative, creating an ever-evolving learning
culture by challenging the status-quo.” Van really focused on the concept of having a
happy guest as well as providing the guest with “the happiest place on earth.”
Disney leaders are known to be great leaders, showing great support to employers
through their enthusiasm, “leaders must provide overt, enthusiastic and sustained
support; be cheerleaders of employee development.” Employees are educated in the
Disney University; it provides employees with a tailored educational experience that
is related to the company’s way of operating. The Disney University employs
entertainment as a training strategy to ensure the maintenance of new concepts. A
famous Walt quote is, “Laughter is no enemy to learning.”
Financial Statement Analysis
Liquidity Ratios:
2010
2011
2012
Current ratio
1.111
1.138
1.070
Quick ratio
0.980
1.006
0.950
Debt Management:
Total debt
2010
2011
2012
45.8%
48.2%
46.9%
Times interest earned
$17.20
$24.45
$26.10
Asset management:
2010
2011
2012
Inventory
turnover
26.507
25.638
27.507
DSO
65.227
68.451
63.067
FATO
2.138
2.076
1.965
TATO
0.55
0.57
0.56
Profitability:
2010
2011
2012
Industry
ROA
5.7%
6.7%
7.6%
7.9%
ROE
10.6%
12.9%
13.4%
18.1%
Profit Margin
10.4%
11.8%
13.4%
14.9%
DU PONT–
2010
2011
2012
Equity Multiplier
1.097
1.05
1.002
Profit Margin
10.4%
11.8%
13.4%
Total Assets Turnover
.55
.57
.56
ROE
10.6%
12.9%
13.4%
P/E Ratio
2010
P/E Ratio
17.62
2011
12.48
2012
Industry
15.18
18.77
Trend Analysis
Liquidity Ratios:
Disney’s Current ratio is stable overall. However, the values are kind of low. This
means that Disney is having trouble paying their debts as they come due. Disney’s
quick ratio is also fairly stable, but in two out of the three years (2010 and 2012),
the quick ratio is less than one, which means that it is dependent on inventory to
liquidate short-term debt.
Debt Management Ratios:
Disney’s Total Debt Ratio is stable, but the values are high. This means that the
company is taking on a lot of debt, but it is proportional to the size of the company.
They have enough in income and assets to pay it off. Disney’s TIE Ratio is increasing
steadily each year, which means that it is able to pay interest, which ensures income
for lenders.
Asset Management Ratios:
Disney’s Inventory Turnover ratio is high yet stable, which means that sales are
strong, and restocking is effective. Days Sales Outstanding is high, which means that
Disney collects on its sales slowly. The Fixed Asset Turnover ratio is decreasing over
time, and is low, which means that the company is not using its fixed assets
appropriately. The Total Asset Turnover ratio is stable, yet low, which means that
they are not using their assets effectively.
Profitability:
Disney’s Profit Margin is high, which means that is making a lot of money on sales
after accounting for all expenses. The Return on Assets ratio is increasing over time,
and is moderate, which means that the company generates moderate net income per
dollar of assets. The Return on Equity ratio is high and increasing, which indicates
that there is a high rate of return of shareholder investment.
P/E Ratio:
Disney shows a high PE ratio in 2010, however it decreases in 2011 and 2012. In all
three years the P/E is lower than the industry’s. This shows that Disney does not
have a high earnings growth when compared with the industry. The low growth rate
indicates that Disney has a high risk for future investors because of low P/E rates
and slow growth prospects. However, the P/E does not summarize the status of how
the company is doing, one needs to look at other financials to better determine how
the company is doing as a whole and whether or not to invest.
Risk Analysis
Negative change in economic conditions: Any decrease in national or global economy
could negatively affect Disney’s business. Since they are in the entertainment industry, in
times of economic crisis, entertainment is not a necessity and is one of the first things cut
from most budgets. Disney has multiple theme parks and in a bad economy people are
less likely to spend money on vacations, resort packages and getaways. Economic change
outside the US could also prove costly since there are also theme parks in Europe and
Asia.
Consumer preferences: Disney has a broad consumer market that has an array or
different products and facilities. Since it is all catered to consumer wants and needs, and
based on their feedback, any changes in the current tastes could result in lowered sales
and numbers. In addition to maintaining exactly what the customer wants, technology has
to always be up to date. Mobile applications and movie and TV compatibility are vital to
keeping customers and relaying information as quickly as possible. Changes in software
and technology could hinder moving forward and keeping the same customers.
Patents & Intellectual Property Rights: With any company at Disney’s magnitude it is
hard to police copyrights and illegal downloading. The main sources of revenue are
movies and TV shows. The risk of bootleg movies and shows are high with the
technology available. Knockoff Disney merchandise also poses a threat to lost revenue.
References:
http://biz.yahoo.com/ic/ll/722per.html
Source:
http://www.nasdaq.com/article/the-4-top-value-drivers-for-disneycm77983
http://www.commpro.biz/corporate-communications/internal-employee-
communications/the-four-circumstances-driving-disneys-organizational-culture/
(valuation)