Running head: DISNEY
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The Walt Disney Company
Joel Cardella
Fred Newton
April Picklesimer
Brandy Rotarius
Siena Heights University
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The Walt Disney Company
History
The summer of 1923 sets the stage for what was to come and be known as Disney or DIS
on the NYSE. Walt Disney traveled to California to peddle his cartoon about a little girl, “Alice
in Wonderland”, to a distributor. October 16, 1923 is the date the Disney Brothers Cartoon
Studio is born. Two brothers Roy and Walter form the company as equal partners. Soon the
company changes its’ name to the Walt Disney Studio.
The cartoon “Alice in Wonderland” spun into a series named The Alice Comedies. This
programming aligned with the mission of the company, to produce family entertainment. During
1927, a decision is made to move towards an all cartoon series. Oswald the Lucky Rabbit came
to life. More money was needed from the distributor, for a second year of cartoons. Walter
learned the distributor owned all the rights to Oswald the Lucky Rabbit. The distributor hoped to
make the cartoons in his own studio, for less money. This was a painful lesson for Walter to
learn. One he never forgot and vowed to own everything he made in the future (Disney, 2012).
The Disney brothers established their growing business and introduced another cartoon
character. Two cartoons were made. They could not be sold, as they were silent films. A third
cartoon, animated with sound, gave birth to Mickey Mouse. Mickey Mouse was born on
November 18, 1928. Merchandising of the Mouse came soon after, followed by cartoon films,
action films and the series airing on television in 1950.
Walter wanted more. He dreamed of an amusement park as he sat on a bench watching
his daughters ride the merry-go-round. Disneyland opened on July 17, 1955. Prior to 1966
28,000 acres of land was purchased in Florida. Walter died on December 15, 1966. The orange
groves surrounded by swamp soon were under development. Walter did not live to see his
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dream become a reality. Disneyland opened on October 1, 1971. Later that same year Roy
Disney died, leaving the Disney legacy in the hands of the next generation of the Disney family.
“For nine decades, The Walt Disney Company has succeeded in making its name
preeminent in the field of family entertainment. From humble beginnings as a cartoon studio in
the 1920s to today’s major corporation, it continues its mandate of providing quality
entertainment for the entire family.” (Disney, 2012)
The Walt Disney Corporation
The Walt Disney Company, along with its subsidiaries, is a diversified entertainment
company. Its animation studio, parks, resorts, consumer products and media networks has
allowed the Walt Disney Company to remain a staple in the entertainment industry along with its
impeccable ability to market to children and adults (Yahoo finance).
Disney's main strength is in its resources, experience in the business, its low-cost
strategy. Furthermore, the company clearly has developed a very strong and well-known "brandname" over many years. The company has also been able to diversify its operations and products
to hedge against decreasing sales in product lines. In recent years, it has diverted into Home
Video, Film, merchandise, Radio broadcasting, and Network television and in theme parks. The
Walt Disney Corporation has effectively diversified its operations from USA to Japan and
Europe (Gillete, 1999).
Sustainable Success Disney is an outstanding example of a company that has maintained
its competitive advantage by routinely making wise decisions about what resources and
capabilities to acquire, invest in, and develop. Disney successfully makes decisions about what
to do with its resources and capabilities given its competitive environment. These decisions
constitute Disney’s strategy, and while their strategic decision-making record is not perfect, it is
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strikingly superior to most firms. As with enduring market leaders in other industries, Disney’s
sustainability is explained by elements of its strategy that are varied, unique, exhibit foresight,
and include imperfectly mobile and co-specialized elements. No other entertainment company –
perhaps no other company period – evokes the feeling of wholesome family goodness (Yahoo
finance). Disney has taken extreme care from its early roots under founder Walt Disney in 1928
to ensure that its image is fun, imaginative, clean, and appeals to people of all ages. It places
high priority on making products predictable and safe (Gillete, 1999).
The movie business and the Network-television departments are extremely risky. In
those two areas of operation, Disney is the intruder, and there are several very powerful rivals. A
less significant threat comes from new cartoon characters. New cartoon figures appear everyday in television shows, and in movie theaters overseas. Will "Mickey and the Gang" be able to
beat the war of the limited market shares internationally and domestically? Only future
generation cartoon lovers can answer that question, but tendencies in the market should be very
carefully monitored (Yahoo finance).
Ideas are born from within the departments and are worked-up throughout the relatively
low hierarchy, where the final decisions are made. The management focuses on group creativity
and in teamwork. For instance, the most creative employees usually met every Sunday in the
purpose of coming-up with new ideas and new business concepts/strategies. The Sunday
meetings are referred to as "Gong Shows" (Gillete, 1999), where all participants have to come-up
with a unique idea. A large emphasis is placed on employee participation, especially on the most
talented employees (Gillete, 1999).
Another interesting approach is the emphasis that is placed on expansion of the business.
Again, the corporate policy is to grow slowly and not to "impress anyone". It is important for the
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company to meet demand with an adequate supply of goods and/or services. Recent trend
towards rapid increase in costs in the movie industry have a direct effect on the profitability of
the company. By cutting back on the costs involved in making and marketing Disney films, less
expensive and more profitable movies can be produced. Efficiency enforced by tight budgets
and expected high returns, have surely made it possible for Disney to produce less expensive
movies than its competitors have (Gillete, 1999).
Financial Analysis
Comparing Disney’s financials to the industry is difficult, due to the large diversity of
Disney holdings. Disney is considered part of the Entertainment industry, and is compared to
entities such as Time Warner, World Wrestling Entertainment, and News Corp all of which are
entertainment media companies). Although Disney has entertainment media holdings such as
motion picture and television divisions, it also operates amusement parks. All resources uses in
the industry analysis were compared to entertainment media.
Disney’s revenues far exceeded its competitors in the previous three years. It showed yearover-year steady increases in revenues, from $38B in 2010 to $43B in 2012. Disney’s 2012
current ratio is 1.17, which has held relatively steady against performance in 2011 (1.16) and
2010 (1.18). The industry average is 5.03. This is attributed to the competition not having as
many physical assets and operating costs. Thus, current ratio is not the only indicator of value.
Disney’s Return on Equity is 14.29% in 2012, compared to the industry average of 7.8%.
ROE has also shown steady increases since 2010, from 10.56% to 12.86%. This shows that
Disney has consistently held profitability, and steadily increased it along with revenues. The
current profit margin for Disney is 13.44% (steadily increasing year-over-year), versus the
industry average of 6.8%. This suggests Disney’s diversification in operations helps to offset
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any losses. Disney reduced inventories from 2011 to 2012, increasing their inventory turnover
ratio to 27.51%. The industry average is 4.06%. While this could indicate Disney is holding
more inventory than competitors are, the fact that they have been increasing their inventory
turnover year-over-year indicates they are paying attention to moving their product and
experiencing strong sales.
One factor for this is the operating margins. Disney’s margins from 2010 to 2012 were
18.61%, 20.73%, and 23.02%. The industry average is 32.06%, but again, that is a comparison
based on Disney’s total holdings, including amusement parks, versus entertainment media
companies. Given that the market capitalization of Disney in $1.46T and the closest competitor
(Time Warner) is $696B, this is an impressive margin to hold, and improve upon over the years.
To further support this, Disney’s P/E ratio has increased from roughly 14% in 2010 and 2011, to
21% in 2012, versus an industry average of 29%. At double the market cap, Disney is showing
strong signs of being as profitable as their competitors are.
To do all of this Disney leverages a lot of debt, operating at a debt ratio of 63%, versus
industry average of 44.64%. Disney has been leveraging down their debt over time, as this ratio
was close to 70% in 2010. This is due to the acquisition of Marvel Entertainment, a stable of
superheroes, which present well on the big screen. Disney’s stock recently hit a record high with
the strong opening of the “Iron Man 3” movie. Disney also acquired the Star Wars franchise
from Lucasfilm in 2013.
A side-by-side comparison of line items might seem to show that Disney is weaker than
some competitors are. However, understanding that Disney has holdings that are more diverse
and more than double the market capitalization, Disney has shown an impressive commitment to
increasing margin and profitability, while maintaining steady growth over the years and
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completing acquisitions. Looking further back Disney weathered the recession of 2007/2008 in a
very similar fashion.
Disney is a long-term growth stock. In 2012, it was held by 33 different hedge funds with
around $2.5B in investments. Currently several market houses have given Disney a Buy rating,
based on a +26% YTD increase in stock price. Target prices have been set to an average of
$71.38. We recommend buying and holding Disney.
Outlook, Summary, Conclusion
The company’s net income rose 36% from a year earlier and to $1.5bn for the first three
months of the quarter ending in March. Revenue at the theme parks climbed by 14%, which was
substantially better than analysts’ expectations. Overall revenue for the group was up by 10%,
helped by a 13% increase in revenue from its movie studios and a 6% rise at ESPN. Their
operating income is also up 29% on revenue growth of 10%. Earnings per share were up an
impressive 36%. Walt Disney World and the Disney Land Resort both set new attendance
records for the quarter. They have also shown increases and growth in their media networks,
consumer products, and kid’s television portfolio.
They continued to repurchase their stock during the second quarter by buying back 15.8
million shares for about $850 million. Fiscal year to date they have repurchased 38 million
shares for $2 billion. They remain incredibly well positioned strategically and financially which
enables them to continue to create value for their shareholders. In addition, if they continue to
grow their cash flow there may be an opportunity to increase their dividend or buyback more
shares. There was nothing on the expense side to really note and they have done a good job of
managing their expenses, particularly when they have continued to invest in growth.
DISNEY
We feel Walt Disney has good investment potential. Many are rating the stock
outperform, with an average price target of $61.04. Next quarter’s average estimate for revenue
is $11.74 billion and the average EPS estimate is $1.07. Next year’s average estimate for
revenue is $45.16 and the average EPS estimate is $3.46. They continue to improve their
numbers in performance and earnings and have a good projection for the future. Disney is
definitely heading in the right direction and a good place to invest.
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References
Gillete, B. (1999). Interview: Doing it “The Disney way”[online interview from meetingsnet].
Retrieved from
http://meetingsnet.com/corporatemeetingsincentives/meetings_interview_doing_disney/
The Walt Disney Company, (2012). A history of the Walt Disney Company. Retrieved from
http://d23.disney.go.com/archives/a-history-of-the-walt-disney-company/
Yahoo finance. Profile. Retrieved from http://finance.yahoo.com/q/pr?s=DIS