Initial Coverage Report

2015-05-13
Recommendation: Buy
Page 1

Company profile

Sales by geography

Media and Entertainment Conglomerate

Founded by Walt and Roy Disney in 1923
Headquartered in Burbank, California
130 000 employees
CEO & Chairman Robert Bob Iger, since 2006

3%
North America

8%

Europe

13%

Asia Pacific
75%

Financial Snap-shot TTM (millions of USD)

Equity related information

Revenues: 50 707

Listed on New York Stock Exchange

Gross Profit: 17 400 (34.3 %)

Market Cap: $185 354 million

Operating Income (EBIT): 12 208 (24.1 % margin)

Share Price: $109.24

Net Income: 8 034 (15.8 % margin)

52 W High: $113.3 (2015-05-05)

52 W Low: $78.54 (2014-10-15)
YTD Change: 15.98 %

Source: Bloomberg as of yy/mm/dd

Page 2

Latin America and

Other

Q2 of fiscal year 2015 beat estimates both top and bottom line

Revenue up 7 % YoY while EPS up 14 % at $1.23 vs. est. of $1.11

Media Networks

T12M Revenue by Segment

2%

Cable Networks and Broadcasting

13 % YoY growth in revenue
Q2 Operating Margin of 36 %
ESPN programming rights majority of contracts expire earliest 2021 onwards

9%

Media Networks

14%

Parks and Resorts

Studio Entertainment

New park opening in Shanghai

6 % YoY revenue growth from higher spending on increased prices for
tickets, food, hotels etc.
Q2 Operating Margin of 15 %

Consumer Products
31%

Marvel on top three grossing films ever, Star Wars VII expected to enter list
Q2 Operating Margin of 25 %
Revenue down 6 % (Avengers not included, since then #1 every market, also
Q2 last year had huge success of Frozen)

Interactive Media

T12M Net Income by Segment

1%
12%

Consumer Products

Toys and other merchandise still driven by last years Frozen

10 % YoY revenue growth
Q2 Operating Margin of 37 %

Media Networks
Parks and Resorts

12%
54%

Parks and Resorts

Studio Entertainment

44%

Interactive

21%

Video games, mobile apps

Q2 Operating Margin of 11 %

Page 3

Studio Entertainment
Consumer Products
Interactive Media

Media and entertainment platform with beloved trademarks

Ecosystem of complementing divisions Studio creates franchises for parks, products and interactive
Intellectual assets are cash cows that fans gladly see milked
At same time push creatively, Pixar and Disney animation have created several new hits over last years
Started creative turnaround with Pixar acquisition under Bob Iger in 2006, exceptional history of profiting on franchises
since
Major source of profits is Media Networks where ESPN is the largest source - sports is only area where TV-viewership is
still growing
Risk with dependency on content creation is consistency, but the track record is impressive

Page 4

Complementary business model

Upswing in profitability since 2006, ROE over 10 % since then and currently at 17.8 %, beating competitors while having
less financial leverage
Marvel purchased for $4 billion in 2009, since then eleven movies have grossed more than $8 billion at box offices
(theaters) alone on budget of less than $2 billion

Even without the additional revenues from products, parks and interactive the deal has been concluded very cheap in retrospect
Paid same amount for Lucasfilms in 2012

Cyclical consumer products division and capital intensive park & resorts made stronger from core business
Example; without the need for paying development costs and franchising fees in producing toys, competitors stand at
clear cost disadvantage as can be seen below for the consumer products compared with toy manufacturers

Page 5

Steady growth and exceptional margin expansion

TTM Revenue
60 000

Gross Margin

TTM Net Income

34%

50 000
40 000
30 000
20 000
10 000
0

40%
35%
30%
25%
20%
15%
10%
5%
0%

9 000
8 000
7 000
6 000
5 000
4 000
3 000
2 000
1 000
0

Revenue CAGR of 4.9 % over past ten years

Net Income CAGR of 12,6 % over past ten years

Gross margin increase from 13 % to 34 %

Driven by improved pricing power and operating leverage from successful franchises
CEO credited with exceptional cost control over all divisions

Page 6

Increased returns and decreased cost of financing

ROE
20,0
18,0
16,0
14,0
12,0
10,0
8,0
6,0
4,0
2,0
0,0

ROA
17,8

9,55

ROIC
14,00
12,00
10,00
8,00
6,00
4,00
2,00
0,00

Page 7

WACC

Increasing dividends and share buybacks while decreasing debt level

Dividends

Share Repurchases

Div. Yield

3 500

2,50

3 000

2,00

2 500
2 000

1,50

1 500

1,00

1 000
0,50

500
0

0,00

D/E in %

High Grade Credit from all rating institutions

(Moodys - A2, S&P A, Fitch A)

Net Debt/EBITDA

60,0

2,50

50,0

2,00

40,0

30,1

1,50

0,78

1,00

30,0
20,0
10,0

0,50

0,0

0,00

Page 8

Strong cash flows

Cash from Operating Activities

Free Cash Flow

12000
10000
8000

Last year higher capital expenditure due to upcoming

launch of Disney World Shanghai, finalizing this year

TTM Q2 FY15 cash conversion rate

(FCF/NI) of 87 % (98 % FY14)

6000
4000
2000
0

Price to FCF
30,00
25,00
20,00
15,00
10,00
5,00
0,00

Page 9

Avg. P/FCF

Trades at a historical premium

T12M PE-ratio

Avg. P/E

30,00
25,00
20,00

22,60
19,14
17,18

15,00
10,00
5,00
0,00

P/E as of today is 23.4

EV/T12M EBITDA
16,00
14,00
12,00
10,00
8,00
6,00
4,00
2,00
0,00

Page 10

Avg. EV/EBITDA
13,43
11,56
10,69

Premium valuation compared to peers is justified

Comcast - Universal Pictures (and Parks & Resorts), NBC

Worlds largest television networks and filmed TV & entertainment company in terms of revenue Walt Disney Company 2nd and
Time Warner 3rd.
Most similar peer, but - "The Worst Company in America" by The Consumerist in 2014

Time Warner Warner Bros., CNN, HBO, DC Comics

21st Century Fox 20th Century Fox, Fox News & Sports

The Walt Disney Co.

186 830

Current
P/E
23,4

Average

117 553

20,0

19,3

16,5

11,8

9,9

3,4

Comcast

146 743

19,1

17,8

15,6

8,0

7,4

2,8

Time Warner

69 456

18,5

18,1

14,6

14,1

9,9

2,9

21st Century Fox

67 185

18,7

19,3

16,2

11,7

10,6

3,8

Name

Mkt Cap (USD)

Est P/E
Q2 2016
19,1

Est P/E
Q2 2017
17,2

EV/
EV/EBITDA
EBITDA Q2 2016
13,4
11,6

P/B
4,1

17 % current P/E and EV/EBITDA

premium compared to average of peers

Net
5yr CAGR 5yr CAGR
Debt/
Revenue Pre-tax profit
EBITDA
0,8
7.8 %
16.7 %

Gross
Margin

Op.
Margin

ROE

Dvd Yld

D/E

The Walt Disney Co.

34,3

23,9

17,8

1.1 %

30,1

Average

45,4

21,4

17,3

1.4 %

77,0

1,8

4.9 %

10.4 %

Comcast

70,4

22,0

15,3

1.7 %

87,9

1,8

14.2 %

17.4 %

Time Warner

41,8

20,6

14,5

1.7 %

92,9

3,2

2.4 %

5.4 %

21st Century Fox

34,9

19,1

21,6

0.9 %

97,3

1,4

-4.9 %

2%

Name

Page 11

Higher operating margins

Higher ROE
Lower D/E
Lower Net Debt/EBITDA
Higher top line growth
Higher bottom line growth

Ability to leverage intellectual property like no other

High quality company with proven core business and a history of highly profitable acquisitions

All divisions growing and with improving margins

One of few concerns is the future of Cable TV in the Media Networks segment

Finalizing of park in Shanghai will increase free cash flow conversion

Potential for continued growth with valuable intellectual assets, main focus on the organic growth

Broadcasting (online distribution) had QoQ 90 % revenue growth and make up approx. 25 % of the segment
TV series Daredevil is aired on Netflix
ESPN have extremely strong position (and #1 in mobile) more power to consumers in choosing content should be beneficial
Disney have more diversified income streams than competitors

Another question is how long Bob Iger will stay at least until 2017 but might stay longer
Strong cash flows have enabled increased dividends and share buybacks while decreasing D/E

Operating margins more than doubled since CEO Bob Iger started
Improved studio business (operating leverage for all segments) and increased efficiency over all

Marvel bought at $4 billion in 2009 and Pixar at $7 billion in 2006 both now considered great strategic moves that have paid off very well
Paid $4 billion for Lucasfilms in 2012, now set to release six movies (three sequels until 2017)

Unique position to utilize intellectual property rights where competitors cannot

For example: Star Wars franchise has brought in $27 billion since inception only $4 billion of these from pure movie revenues
Disney have strong track record of milking spinoffs and creating attractive merchandise

22
15

Current price: $109.6

Average analyst 12 month target price: $116.84 (+7 %)

0
BUY

Page 12

HOLD

SELL

Recent Outperformance

Upside

Diversified earnings with profitable growth and highly

anticipated movies in pipeline
Unique position to utilize intellectual assets and
relatively unexploited markets (i.e. Mainland China)
Strong cash flows make possible buybacks and
increased dividends

Downside

Higher cost of acquiring sports programming

Industry challenge in transition to new distribution
platforms
Dependent on continued creativity

Page 13

Investment Conclusion
Motivation
Quality company with several strong trademarks and much room
for continued growth
Popular franchises and networks
Track record of creativity and successful strategic acquisitions
Diversified business model with clear competitive advantage
Cost efficient and financially stable with history of increased
dividends and possibility of another buyback program
Historical and peer valuation premium warranted due to higher
profitability and growth with lower financial risk

10 largest shareholders
Name

% of shares held

BlackRock

4.94 %

Vanguard Group

4.85 %

State Street

4.18 %

Fidelity

2.7 %

State Farm

2.48 %

Capital World Investors

1.85 %

Northern Trust Investments

1.4 %

T. Rowe Price Associates

1.25 %

Government Pension Fund of Norway

0.90 %

Norges Bank

0.87 %

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