mercedes zirolli the walt disney company (dis)...mercedes zirolli july 2, 2017 the walt disney...

Mercedes Zirolli

July 2, 2017

The Walt Disney Company (DIS)

Current Recommendation Buy

Current Price (FYE Date) $97.82

Valuation $136.70

Industry: Consumer Services

Competitors ROE

Sales 5yr

CAGR

EPS 5yr

CAGR P/E Beta

CMCSA 17% N/A 1.4% 21x 1.25

TWX 16.8% 12.7% 4.3% 18.9x 0.85

FOXA 50% -2.6% 2.0% 16.4x 1.45

Average 27.9% 5.05% 2.6% 18.8x 1.18

Key Ratios

2014 2015 2016 Comps

Avg.

Quick Ratio 1.02 .93 .92 1.26

Debt/Equity 28% 29% 38% 112%

Gross Margin 46% 46% 46% 50.3%

Net Margin 15% 16% 17% 12%

Asset Turnover 3.22 3.13 3.28 .50

Equity Multiplier .34 .38 .39 1.41

ROA 9.07% 9.73% 10.42% 5.53%

ROE 16.67% 18.78% 21.7% 16.7%

Key Statistics

Current Price $110.65

Annual Dividend

$1.42

1yr Total Return

2.4%

Sales 5yr CAGR

6.3%

EPS 5yr CAGR 17.6%

DuPont-based g 17.4%

P/E-implied g 16.5%

P/E 15.6

x

Beta 1.30

Required Return

12.1%

Valuations

FYE Price $97.82

Target Price from Forecast $116.35

Forecast Expected Return 2.4%

Forecast Valuation $105.32

DCF Valuation $136.70

Financial Forecasts

2014A 2015A 2016A 2017E

Revenue $48,813 $52,465 $55,632 $57,746

Net Income $7,510 $8,382 $9,391 $9,748

Summary/Highlights: • Leading company in the Consumer Services

industry with 4 different company segments with many different opportunities within each, strong creative advantage, and constant growth in sales.

• The Walt Disney Company focuses on family entertainment and media enterprises.

• With new endeavors, such as Disney Shanghai, new movies, and the creation of Pandora land the company should see an increase in revenues and income in 2017

• EPS is expected to grow in coming years. • Risks: entry of new niche competitors like

Universal with Harry Potter World; Decrease in the GDP or Consumer Confidence could impact Disney’s net income and revenues.

TheWaltDisneyCompanyValua4on 2

THE WALT DISNEY COMPANY

PRESENTED BY:

MERCEDES ZIROLLI


THE WALT DISNEY COMPANY VALUATION

BUSINESS

The Walt Disney Company is an international family entertainment and media operation.

The Walt Disney Company was founded in October of 1923 by Walt Disney and is

headquartered in Burbank, California. Within the Walt Disney Company there are four different

business segments that make up the total operations of the company. These segments are Media

Networks, Parks & Resorts, Studio Entertainment, and Consumer Products & Interactive Media.

These four business segments are The Walt Disney Company’s primary businesses. The industry

in which Disney operates in the Media Conglomerates section.

MAJOR SEGMENTS

Within the first segment, Media Networks, the company runs both “cable and broadcast

television networks, television production and distribution operations, domestic television

stations, radio networks and stations” (FactSet). The second segment, Parks & Resorts focuses

on the owning and operating of “The Walt Disney World Resorts in Florida, The Disneyland

Resorts in California; Aulani, a Disney Resort & Spa in Hawaii; The Disney Vacation Club; The

Disney Cruise Line; and Adventures by Disney.” The Studio Entertainment segment “produces

and acquires live action and animated motion pictures,” the creation of DVD content, music

endeavors and live plays. (FactSet). Under this segment the company runs under Walt Disney

Pictures, Pixar, Marvel, Lucas Films and Touchstone. The final segment of the company,

Consumer Products & Interactive Media, focuses on the licensing of the company’s trade names,


characters and visual and literary properties to various branches of business, including game

developers, manufacturers, and more internationally (FactSet). This segment also works on

creating games for mobile platforms, books, comic books, and magazines. Consumer Products &

Interactive Media handles distribution of retail merchandise, management, and design of the

company’s websites and creation and distribution of online content.

COMPETITION

The top competition that the Walt Disney Company faces, in their industry are, The

Comcast Corporation Class A, Time Warner Inc., Twenty-First Century Fox, Inc. Class A, CBS

Corporation Class B, and Viacom Inc. B.

TABLE 1: PERCENTAGE OF TOTAL SALES PER SEGMENT

Source: FactSet The Walt Disney Company Segment History

Table 1 shows the percentage of total sales from 2007-2016 in each business segment in the

Walt Disney Company. Throughout these years, the Media Networks sections constantly carry

the majority of the sales percentage, while consumer products and interactive media are

consistently the smallest portion.


TABLE 2 PERCENTAGE OF GROWTH PER SEGMENT

This table shows the percentage of growth in each segment of the Walt Disney Company from

2007-2016. During the years 2008 and 2009 each segment, except for the Media Networks,

experienced negative growth. The Parks &Resorts segment experiences the lowest negative growth

while Studio Entertainment experienced the highest, with a growth of -16.5%.

Source: FactSet The Walt Disney Company Segment History

GROSS DOMESTIC PRODUT

Year Current GDP (in Billions)

Real GDP (based on 2009)

Real GDP Growth Rate

2007 14,477.6 14,873.7

2008 14,718.6 14,830.4 -0.29%

2009 14,418.7 14,418.7 -2.78%

2010 14,964.4 14,783.8 2.53%

2011 15,517.9 15,020.6 1.60%

2012 16,155.3 15,354.6 2.22%

2013 16,691.5 15,612.2 1.68%

2014 17,393.1 15,982.3 2.37%

2015 18,036.6 16,397.2 2.60%

2016 18,569.1 16,662.1 1.61%

Table 3 GDP per year source: BEA


The table above gives the nation’s GDP and real GDP from 2007-2016. Included is the growth

rate of the real GDP. This relates to Table 2, during the years in which the growth rate of the

real GDP is in the negatives the growth of Disney’s Sales per segment is also in the negatives.

This shows that when the country ability to spend starts to decrease companies in Disney’s

industry will too go down. Yet when the economy is thriving as it appears in 2014 both the

GDP and The Walt Disney Company’s growth of sales increase.

UNEMPLOYMENT RATE

Table 4 Source: US Department of Labor, Bureau of Labor Statistics

The table above shows the unemployment rate per month per year throughout the United

States. During the years in which the unemployment rates were extremely high, 2009-2010,

you can see the affect it has on the company. With less people employed there is less money

coming from households to spend on entertainment such as the Walt Disney Company. Yet

during times when unemployment rate is lower, the Walt Disney Company’s sales growth is

seen growing in the positive direction rather than shrinking, like it did during the years of high

unemployment.


CONSUMER CONFIDENCE INDEX

GRAPH 5 SOURCE: OECD DATA.

The graph above shows the United States’ Consumer Confidence Index from December of

2007 through December of 2016. The consumer confidence index displays the level of

confidence the consumer households’ have in making purchases with their disposable income.

When the consumer index is higher, consumers are more likely to spend money on expenses

like entertainment, therefore increasing the revenue of the Walt Disney Company. This

correlation of confidence and spending is displayed in Table 2. During the years of 2008 and

2009 the percentage of sales growth shows a decrease in sales. This correlates to the decrease in

consumer confidence, if households are not spending their income sales of a consumer services

business, that focuses on entertainment, would not increase. Whereas the Walt Disney Company


saw a major growth in the percentage of sales during 2014. This is shown in the Consumer

Confidence Index as well since the index was at its peak during the same year.

INDUSTRY

The Walt Disney Company operates in the Consumer Services Industry. The Consumer

Services industry is very large and is comprised of many different types of companies.

Companies within this industry range from hospitality businesses like Marriott and

McDonald’s, as well as retail businesses like Amazon, Walmart, and Home Depot, and

Television Services and entertainment. The entertainment division is where the Walt Disney

Company falls. The top performing companies in this industry range from shopping stores like

Amazon and Walmart to entertainment broadcasting companies like The Walt Disney

Company and Comcast Corporation. Since the Consumer Services industry is so, this report

focuses on companies within the industry, with similar products, services, and size of company.

COMPEITITON

The competition chosen to compare against The Walt Disney Company in this valuation

are Comcast Corporation, Time Warner Inc., and 21st Century Fox. Each of these companies

are involved in the television broadcasting service, in the consumer services industry, and

generate a similar level of income. Each of the chosen companies present some level of threat

to the Walt Disney Corporation and are existing rivals to the company. While these companies

compete with the Walt Disney Company on some level none of them can act as substitutes for

the company. While each company has one major focus, Disney has multiple that can fully

compete with each segment of these companies. In comparing the stock prices over the past 5

years shows that while the Walt Disney Corporation’s stock price is higher than most, the


Comcast Corporation and Time Warner Inc. both ranged from low troughs to high peaks for

their company. During this time the Walt Disney Corporation managed to stay relatively

consistent in their prices in the past few years. This can be seen in Table 3 as the variation of

stock prices is higher in Comcast and Time Warner, both these companies increased while 21st

Century Fox’s stock price has been dropping over time.

The buyers of the Walt Disney company range from other retailers in the industry like

Walmart and Amazon, as well as its competition, Comcast offers channels programmed from

the Walt Disney Company such as ABC, Freeform, and the Disney Channel. This helps

increase not only Disney but Comcast’s sales as well. If Disney were to stop working with

Comcast, Comcast’s stock price as well as revenue would surely go down. Disney is also sold

to households, being a major portion of their sales. This relates to the state of the economy as

GDP and unemployment because if those are in good standing, households will be more willing

Table 6 Source: NASDAQ


to spend money on entertainment such as Comcast television and Disney products, vacations,

and programs. Since Disney is so diverse it is hard for its competition to act as substitutes for

the company itself. In relation to the Porter framework Disney doesn’t have to worry as much

about the substitutions and buyers as it does its existing rivals and new entrants into the

industry. With the recent creation of Harry Potter World at Universal Studios, whose parent

company is Disney’s competitor Comcast, Disney needed a new product of that same scale to

continue to compete with Comcast on the same level. This led to the creation of land of

Pandora in Animal Kingdom. By creating this new land Disney could increase ticket sales at

the Animal Kingdom Park, gain a new demographic of consumers, and continue to actively

compete with its competitors like Comcast.

FINANCIAL ANALYSIS

Table 7 Data Source: Morningstar


After reviewing the Walt Disney Company’s financial ratios, it seems clear that the most

important aspect of the Walt Disney Company’s liquidity continues to be the consumer

confidence. Since the company is an entertainment company in the consumer services industry,

it strongly benefits from across the board consumer confidence. This is shown through the

DuPont ROE during the past two years, as the economy has steadily continued to grow in a

positive direction the consumer confidence in the Walt Disney Company grows along with it.

Its parks thrive, movie watchers watch more movies, more television shows are enjoyed and are

able to be develop in time of positive economic growth and strong overall confidence. People

plan and go on vacation, parents take children to movie theaters, and families have time to

watch and enjoy the Walt Disney Company’s T.V. shows and sporting events.

In comparison to its competitors the Walt Disney Company has a higher ROE than

Comcast, Time Warner, and 21st Century Fox. While Comcast has a slight higher asset turnover

ratio, the Walt Disney Company is still managing to do consistently well in that department and

growing each year and coming in a close second to Comcast. While comparing the total debt to

capital the Walt Disney Company is the safer and smarter company to go with if you are

making a decision solely on total debt to capital. While Disney has a .32 its competitors are all

over .50 showing that their company could be more of a financial risk and holds less leverage

than the Walt Disney Company.

Overall the Walt Disney company has higher profitability ratios than its competitors,

especially in the last few years. This can be attributed to the release of Disney’s frozen in the

end of the 2013 year, this led to spinoff productions, new rides at the park and visits with the

character’s. During this release the company was able to profit in all segments since based off

the movie they were able to add to the revenue created from the media networks division by


broadcasting Frozen on T.V. and selling it on DVD, the Parks& Resorts by adding to Walt

Disney World and Disneyland with the characters from the movie, new shows for customers to

interact with, and character meet and greets, the Studio Entertainment obviously grew with this

addition, and the Consumer Products division grew with the creation of books, games, and

integration of characters into new or existing products. Disney could keep this momentum

going by recently releasing Moana in the last year. By doing this they are drawing more

attention to their new Hawaii location increasing Parks & Resorts, growing to their studio

entertainment, as well as consumer products, and by the cast giving performances of the music

from the movie on Disney broadcasted shows like Dancing with the Stars, the company is

increasing their Media Networks segment as well. All the new additions and increasing revenue

show why the Walt Disney Company is largely outperforming its competitors in the

profitability section.

P/E ANALYSIS

The markets expectation is showing for the Walt Disney Company to continue to

perform and grow at a straight rate. The P/E Ratio compared to the company’s competition is

on par with its competitors. As the economy continues to show confidence and growth in

coming years the Walt Disney Company should thrive as well. I think the assumption that the

company will continue to grow in coming years is realistic as Disney continues to broaden its

stroke of outlets, park, hotels, television, movies, internet outlets, and because of this the

consumer confidence continues to grow. Since the economy and the Walt Disney Company

continues to do well, the GDP, consumer confidence, and unemployment will continue to

increase and shrink at the desired respective levels.


FINANCIAL FORECAST

I believe that the Walt Disney company is expected to grow a decent amount due to the

newest additions to the company’s ever growing list of products. With the newest addition of

Pandora in the Walt Disney World park of Animal Kingdom. This will surely increase revenue

and sales growth in the coming year. Also with the latest release of Disney’s live action Beauty

and the Beast the company is opening themselves up to the possibility or remaking the magic of

their previous widely successful animated classics and turning them into live action movies. As

shown in table 6 the company’s net income is expected to grow as is EPS in the coming year.

Based on my research and carefully reviewing the P/E of the company for 2016, the forecasted

P/E from Nasdaq database, and the P/E of the Walt Disney Company’s competitors the P/E

assumption that makes the most sense for this company is to go with the forecasted P/E ratio

from Nasdaq, which was 17.58%. This information combined with the forecasted closing price

leads me to believe that the Walt Disney Company is currently undervalued. The forecasted

Table 8 Data Source: Morningstar


closing stock price is currently more than what the stock is trading for on the market now. The

table below (table 6) includes the information used to predict this outcome. The Walt Disney

company is expected to grow at a consistent rate with the beta of 1.3 and the required return of

12.1%.

VALUATION

I decided to use the P/E ratio model when valuating this company. This seemed like the

best course of action considering how large and diverse the Walt Disney Company is. The exit

price of 209.76 is based on the fact that currently with the new administration in office and the

state of the economy the stock price of the Walt Disney Company is sure to increase as time

goes on. Since the economy is thriving this will lead the Walt Disney company to increase

revenue. Since it is a company based on consumers, if the consumers are happy and their

Table 9 Financial Forecast Source: FactSet Financial History


incomes are growing as the unemployment rate decreases and the GDP increases, more

consumers will be happy to spend money on seeing a movie, visiting an attraction, or buying

merchandise from the Walt Disney Company. With the additions of the Star Wars franchise,

the Avatar adaptation, and the success of the newer productions out of the Walt Disney

Company’s Studio Entertainment segment, Disney will surely continue to grow in size and

income. These factors can help explain why the exit price of the stock is on the bullish side as

opposed to bear.

The valuation of the company, based on table 7, is at $136.83 using the P/E ratio

method, whereas when forecasting the valuation in table 9, it was at $105.32 this shows that

even though the valuations slightly differ both show that the company is currently undervalued

making it a stable and smart purchase for any interested parties. Since the stock is currently

undervalued this could indicate that investors will continue to increase dividends if the market

continues to behave in the manner it is. The Walt Disney Company is using the current state of

the economy to its advantage by already starting work on both a Toy Story themed lands in

their parks currently. These additions will increase consumer purchasing, experience, and

overall confidence in the Walt Disney Company.


CONCLUSION

After careful review of the Financial Forecast, Discounted Cash Flow Model, and the

growth rate that was implied from the Walt Disney Company’s stock’s current P/E I

recommend investing in the Walt Disney Company. While both the Financial Forecasting

Model and the Discounted Cash Flow Model show that the Walt Disney Company is currently

undervalued, and all the models demonstrate the same required return, I would base my

decision from the Financial Forecasting Model. This is because this model factors in the past 5-

years of company financial information and is only trying to forecast one year into the future

while the Cash Flow Dividend model is basing its information off one year, 2014, and

attempting to predict the following 5 years and basing its valuation off that information. The

Financial Forecasting Model also factors in the growth of sales and dividends, in addition to

Table 10 DCF Source: FactSet


factoring in the EPS and its growth. I feel that a valuation with more factors being evaluated is

a safer route to go.

With the economy in the state that it is and the GDP increasing each year at a consistent

steady rate, as seen in table 3, this indicates that Disney’s income in each segment of its

company will too increase with this rate. A rising GDP also indicates that the unemployment

will continue to steadily decrease because if the GDP is rising the unemployment rate should be

dropping since they appear to have an inverse relationship as displayed in the correlations

between tables 3 and 4. As the economy continues to grow and we as a financial economy

operate in a bull market the consumer confidence will grow in relation to the Walt Disney

company increasing their sales, introducing new products, and continually finding new

innovative ways to continue to spread the Disney magic throughout the United States and their

international endeavors as well.


APPENDIX A: BALANCE SHEET


APPENDIX B: INCOME STATEMENT


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industry.aspx?industry=Consumer%2bServices&page=16#. Accessed 24 June 2017.

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2017.

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www.nasdaq.com/symbol/dis/revenue-eps. Accessed 23 June 2017.

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