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MICC The Walt Disney
Company
Initial Coverage Updated (October 3, 2014)
The Walt Disney Company (NYSE:
DIS)
Report developed by
Kyle Easop, Kenan Mutlu, Kayla
Brooks, Jacqueline Torres
Kfe6@cornell.edu
631-252-3946
Summary of Key
Information
The Walt Disney Company
NYSE: DIS
Multi-Industry media conglomerate
with established presences in
entertainment and recreation
Rating
Hold
Market Rating
Buy
Stock Data (NYSE)
Price: $88.45 (October 3, 2014)
Market Cap: $151.83B
Shares Outstanding: 1,716.5M
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Introduction
The Walt Disney Company is an international
entertainment company founded in 1923. It operates in
five different segments: Media Networks, Parks and
Resorts, Studio Entertainment, Consumer Products and
Interactive. They are headquartered in Burbank, CA
and run on a fiscal year from October 1st to September
31st. Notable officers and directors include:
Officer Name
Title
Robert Iger
President/CEO
James Rasulo
CFO
Executive VP Corporate
Kevin Mayer
Strategy and Development
John Pepper
Chairman
Stock Performance
Disney has outperformed the S&P 500 consistently
over the past three years
Over the last three years Disney has returned about
200% while the S&P 500 has only returned about 75%.
3
Year
Stock
Return
S&P
500
Disney
250.0%
200.0%
150.0%
100.0%
50.0%
0.0%
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Investment Assessment
We are initiating coverage with The Walt Disney
Company with a Hold rating.
The Walt Disney Company has been a large player in
the entertainment and leisure activities since being
founded in 1923. As the worldwide economy continues
to improve and disposable incomes continue to rise
Disney will take advantage of that and capitalize on the
increased leisure spending.
Disney is spreading more internationally through all of
its divisions, as well as expanding domestically. Due to
a wide range of new products in development Disney is
poised to continue to increase revenues into the future.
With a history of strategic mergers and acquisitions,
including Marvel and ESPN, Disney is expected to
continue to take advantage of potential new revenue
streams and grow shareholder value.
Business Summary
Disney operates in five main segments: Media
Networks, Parks and Resorts, Studio Entertainment,
Consumer Products and Interactive
o Media Networks: This division owns broadcast
and cable television networks and manages
television production operations. Revenue is
derived from fees charges to cable, satellite, and
telecommunications service providers, as well as
fees for advertising.
o Produces and distributes programs
through the ABC Television Network and
ABC Studios brans.
o Cable networks include ESPN, in which
Disney owns an 80% stake; Disney
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Channels Worldwide; ABC Family; A&E
Television Networks, in which Disney
owns a 50% stake; SOAPnet and
UTV/Bindass. Also subsidiaries of these
networks are owned as well.
o Popular shows produced by Disney
(through ABC Family) include: Castle,
Criminal Minds, Greys Anatomy, Scandal,
Cougar Town and Jimmy Kimmel Live.
o Disney owns a 33% interest in Hulu.
o Parks and Resorts:
o Domestically, Disney owns and operates
Walt Disney World Resort in Florida,
Disneyland Resort in California, a Disney
Resort & Spa in Hawaii, Disney Vacation
Club, Disney Cruise Line, and
Adventures by Disney.
Under these resorts Disney owns
Magic Kingdom, Epcot, Disney
Hollywood Studios, Disney
Animal Kingdom, Disney Blizzard
beach and Disney Typhoon
Lagoon.
o Internationally, Disney has ownership in
a number of Parks and Resorts including
a 51% interest in Disneyland Paris, 48% in
Hong Kong Disneyland Resort and a 43%
stake in Shanghai Disney Resort. Disney
also collects royalties from Tokyo
Disneyland.
o Studio Entertainment
o Produces live-action and animated
motion pictures, music, live plays, and
direct-to-video content.
o Productions are shifting away from
independent films and towards highly
recognizable and family-friendly
franchises.
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o Disney operates under the names Walt
Disney Pictures, Pixar, Marvel,
Touchstone, and Lucasfilm.
o Until 2016 Disney has an agreement with
DreamWorks Studios to distribute live
action motion pictures via Touchstone.
o Consumer Products
o Develops and sells a wide range of
products based on Disneys intellectual
property.
o Revenue is derived from licensing use on
intellectual properties to manufacturers,
as well as wholesaling childrens books,
and selling magazines, games, playing
cards and hobby goods.
o Operates under the name, the Disney
Store.
o Interactive
o Focuses on producing interactive games
across media platforms, as well as
licensing intellectual property to other
developers.
o Popular titles include Disney Infinity, Epic
Mickey 2, Club Penguin, Marvel Avengers
Alliance, Gardens of Time and Wheres My
Water.
Revenue
by
Segment
Millions of $
25000
Media Networks
20000
15000
Studio
Entertainment
10000
5000
Consumer Products
0
2010
2011
2012
2013
Interactive
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General Financial Overview
Ticker
FOXA
TWX
VIA
AMCX
CCL
DIS
Symbol
DIS
Total Assets
$83,723M
Price
$88.45
Shares Outstanding
1,716.5M
ROA
ROE
8.68%
16.76%
EPS
4.16
P/E
21.24
Book Value
26.78
P/B
3.24
P/S
3.37
EV/EBITDA
Avg. Daily Volume
12.00
5,671,070
Dividend Yield
1.00%
Industry Summary
Disney is a competitor in numerous industries and no
other company competes in all the areas that Disney
does
The most direct individual competitors across all
segments include: 21st Century Fox, Time Warner
Cable, Viacom, AMC Networks, and Carnival Cruise
Lines.
Total
Share
Market Cap
P/E
P/S Revenue
ROA
(millions)
Assets Price
$47,716
17.11 2.34 $31.87B $54.793B $34.07 6.49%
$64,292
15.88 2.14 $30.57B $67.994B $74.72 7.06%
$31,850
13.87 2.31 $13.44B $23.829B $75.30 11.37%
$4,110
18.51 2.58 $1.88B
$2.636B $56.95 11.60%
$30,750
21.87 1.99 $15.82B $40.104B $39.58 2.87%
$152,824
21.24 3.37 $47.99B $81.241B $88.45 8.68%
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5
Year
Stock
Price
Change
250%
200%
150%
100%
50%
0%
FOXA
DIS
TWX
VIA
AMCX
CCL
Media Networks:
Disney is the largest competitor in the Media Networks
industry. Over the next five years this segment is
expected to expand due to increased advertising
spending across the economy. Even though there is
expected to be a transition from television to digital
advertising over the next few years it is projected that
over the next five years revenue is expected to grow at
an annualized rate of 3.7%. Since Disney has an online
presence already it is expected to take advantage of the
shift to online advertising as well.
Television
Production
Market
Share
15.5%
29.6%
7.8%
DIS
VIA
NBC
TWC
10.7%
FOXA
16.3%
20.1%
Other
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Studio Entertainment:
The movie & video production industry is expected to
only grow by .8% a year annualized over the next five
years. This is partly due to the inundation of 3-D films
into the market, which carry higher production costs
than traditional films. Much of the revenue sourced
from this industry is being transitioned into the
distribution channels, which Disney also has a strong
foothold in. Despite the poor industry outlook for this
segment Disney has defied industry struggles by
releasing blockbusters including The Avengers, as well
as reaping strong sales from DVDs and Blue-ray films.
In the movie & video production industry Disney is the
second largest company, behind only FOXA.
Movie
and
Video
Production
Market
Share
14.10%
34.20%
9.50%
12.70%
DIS
VIA
TWC
NBC
FOXA
16.30%
13.20%
Other
Parks and Resorts:
Consumer spending is expected to rise at an annualized
rate of 2.6% for the next five years which will directly
correlate to increased spending at Parks & Resorts.
Additionally, domestic travel and international travel
into the United States is expected to increase by 3.2%
and 3.5% annualized for the next five years
respectively. Disney is by far the largest competitor in
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this industry and as such stands to take advantage of
the projected increases in revenue.
Parks
and
Resorts
Market
Share
13.4%
DIS
6.4%
7.8%
Universal
48.1%
SeaWorld
Cedar
Fair
8.4%
15.9%
Six
Flags
Other
Consumer Products:
The toy and craft wholesaling industry, Disneys
primary foray in Consumer Products, is expected to
grow for the next five years at an annualized rate of
1.7% to a total $31.6B.
Additionally, the retail market for toys is anticipated to
see modest annualized growth over the course of the
next five years. As disposable incomes continue to
increase, this industry is expected to grow at 1.3% a
year until 2019. Disney is not one of the main
competitors in the Consumer Products industry, but it
licenses out the rights to produce toys with its
intellectual property frequently. Thus, Disneys
revenues are tied to the health of the industry.
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Percent Change
3
2
1
0
-1
-2
2007
2009
2011
2013
2015E
2017E
2019E
Interactive:
Though Disney is not one of the largest players in the
video game industry but they are expanding into it.
The video game industry in the US is expected to grow
at an annualized rate of 5.3% for the next five years.
Additionally, Disney has a focus on the Social Network
Game Development industry, and this industry is
expected to at an annualized rate of 16.9%. However,
revenue growth in this area is expected to slow in the
future as social networks begin to charge more for
social games, and for the use of virtual currencies. As
Disney expands their Interactive division they should
be able to capitalize on this growth.
Last Quarter Financial Highlights
Disney had a strong Q3 in 2014. Compared to 2013Q3
Disney saw higher revenues in all of their five
divisions than the previous year
(Revenue #s in
Millions of Dollars)
Media Networks
Parks and
Resorts
2014Q3
2013Q3
5,511
5,352
3,980
3,678
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Studio
Entertainment
1,807
1,590
Consumer
Products
902
775
Interactive
266
183
Total
12,466
11,578
In total Disney had an increase in sales revenue by 7.6%
compared to the same quarter last year.
For the trailing nine months net income increased
20.16% over the last years trailing nine months, at the
end of Q3. 2014Q3 compared to 2013Q3 saw an increase
of 18.9% in net income.
Trailing
Nine-Month
Revenue
And
Net
Income
Growth
40000
30000
Reveune
20000
Net
Income
10000
0
2012
2013
2014
Growth Opportunities & Risks
Growth Opportunities: Disney is currently pursuing a
large number of different projects to leverage their
influence and products to expand their business.
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Interactive:
o Disney has been working on expanding
their influence in the gaming market,
particularly the mobile gaming industry.
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o During FY2013 Disney released and
updated titles including: Infinity, Epic
Mickey 2, Club Penguin, Marvel
Avengers Alliance, Gardens of Time and
numerous mobile games.
o With widely known characters and stories
pertaining to all age groups Disney
should be easily capable of leveraging all
these assets into profitable gaming
enterprises.
LucasFilms interactive gaming
market has already cause a 7%
increase in revenues for the
Interactive segment.
Studio Entertainment:
o With the recent acquisition of LucasFilm
Ltd. LLC in 2012 Disney acquired rights
to the Star Wars franchise and plans on
releasing additional sequels to the wildly
popular franchise.
There are currently three movies
planned for upcoming release, the
first of which in 2015.
o In 2010 Disney acquired Marvel and has
seen success with leveraging their
universe and characters to make movies
and will continue to do so.
o Disney will likely continue to acquire
more companies to diversify their appeal
to all demographics.
Risks: Disney shares systematic risks as much as any
company in its industry. Some of the risks however that
Disney is especially susceptible include:
o General slump in the economy and declining
disposable incomes.
o Theme parks and resorts compete with other
forms of entertainment, lodging and tourism.
o Loss of exclusive rights to various characters and
copyright claims.
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o Continued production of in-demand content
including broadcasting offerings, movie
productions, video game productions, and
innovations to resorts and parks.
o Piracy of motion pictures, television
programming and video content has increased
the size of the unauthorized copies market.
o The
lack
of
market
transparency
and
tolerance
for
illegal
connections
to
cable
systems
have
resulted
in
big
losses
in
revenue,
especially
in
many
Asian
countries.
o Increased costs of financing for large-scale
projects.
o International culture and relations impacting
Disneys ability to spread and gain popularity on
a global scale.
Valuation
Relative to its competition Disney appears to be fairly
valued or slightly overvalued
Taking the companys main competitors a relative
valuation was created using a variety of ratios. As
summarized below the simple average valuation given
by the multiples comes out to $86.17, just below the
most recent closing price.
Competitors
P/E
P/B EV/EBITDA P/S AVG
CCL
21.87
1.19
11.05
1.89
FOXA
17.11
4.23
13.31
2.30
TWX
15.88
2.42
9.76
2.05
DISCA
22.71
4.09
12.93
4.19
AMCX
18.51
3.49
10.60
2.16
DIS
21.24
3.24
11.79
3.10
Average
19.09 3.495
11.678
2.76
Implied Price $79.41 $93.60
$92.93 $78.75 $86.17
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A Discounted Cash Flow analysis reveals that Disney
is actually undervalued given the implicit
assumptions
Using a discounted cash flow model a fair price for
Disney was determined to be $108.33. This implies the
stock is currently trading at a 22.47% discount to its
intrinsic value. The assumptions that go into this
valuation are as follows.
Revenue was projected by segment using past years
growth rates as well as accounting for significant events
in the upcoming years believed to have a larger than
average impact on the segments revenue. These events
are mostly addressed in the growth opportunities
section.
An appropriate discount rate for the free cash flows
was found to be 7.858% by using a weighted average of
the cost of equity and the cost of debt. Cost of equity
was determined to be 9.89% by using a beta of 1.07 and
a market risk premium of 7%. Cost of debt was
extracted from the companies 10-K as 3.22%. The
perpetuity growth method was used to predict a
terminal value. The perpetuity growth rate was
assumed to be 2.5% since the company is a relatively
consistent growth generator, and it is believed they will
continue to be into the future.
Below is a sensitivity table corresponding to differing
discount rates and perpetuity growth rates:
Analysis
8.86%
7.86%
6.86%
WACC
1.5%
$79.17
$92.97
$103.32
3.0%
$96.81
$118.38
$135.08
3.5%
$104.88
$130.74
$151.16
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Recommendation
Based on the significant size and dominance of Disney
in its industry, as well as the many projects that they
currently working on, and immense potential for future
growth, Disney looks to have strong growth prospects
and it commands a high valuation. Based on the
multiples valuation and the discount cash flow
valuations Disney appears to be trading at or below its
intrinsic value. Thus, Disney is considered a hold, since
the comparable valuation showed Disney to be trading
a bit more expensive than its competitors.
Disney is still a strong company and has a lot of growth
in its future, and is definitely a stock to hold onto.