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The Walt Disney Company A Company Analysis Report

By Austin Masal

Professor Mark Hannan

BADM 2003W Analysis of Business Issues GTA Leigha McReynolds

May 2013

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TABLE OF CONTENTS Executive Summary................................... 3 Introduction................................................ 4 Statement of Purpose Introduction of Company Criteria for Investment Road Map Qualitative Analysis................................... 5 Management and Mergers Mission and Values International Expansion Marketing Mix SWOT Analysis Quantitative Analysis................................. 9 P/E Ratio Debt/Equity Ratio PEG Ratio Intrinsic Value Net Cash Flow Market Share and Market Growth Recommendations...................................... 14 Appendix..................................................... 16

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EXECUTIVE SUMMARY This analytical report will provide a look into The Walt Disney Company’s qualitative and quantitative history. The intent is to give investors ample information so they can make an informed and educated decision on whether to invest in this company or not. The report will state criteria for what a company should have in order to be classified as a good investment. The report will conclude with a detailed recommendation from me to potential investors. Criteria for what makes a sound investment opportunity are as follows: a strong corporate management team, operation that is in alignment with the values of the founder, ability to keep investor confidence through stable financial standings, and ability to grow in national and international markets. The report will provide information regarding Disney’s management, mergers, mission, values, international expansion opportunities, Marketing Mix, and SWOT analysis. The SWOT analysis compares Disney’s strengths, weaknesses, opportunities, and threats/competitors. The report will also provide a detailed examination of Disney’s PE ratio, PEG ratio, Debt/Equity ratio, Net Cash Flow, and market share and growth. Disney’s current CEO, Robert Iger, has continued the company’s success, even after the economic crisis of 2008. He has overseen successful mergers with Pixar and Lucasfilm, and intends to use the latter for future film productions to increase revenues. Iger’s experience makes him very credible. Iger, as well as all those who work for Disney, follow in the footsteps of the founder, Walt Disney. Walt Disney’s values are exemplified through Disney’s current products and services, and still features the iconic Mickey Mouse. Disney’s success has come mainly from national endeavors, but can always be expanded internationally. Certain developing countries are showing more and more potential for revenue gain, and Disney has the resources necessary to expand to these markets. It must do so very soon, to make sure that it keeps up with and surpasses competitors. Disney handles its marketing very well, in terms of its products, positioning, promotions, and pricing. Disney’s strengths include successful movie productions, mergers, and efficient operations over many large subsidiaries. Disney’s weaknesses include initiating mergers that have high risk, and having a reputation that can be easily tainted. Disney’s opportunities include the potential for new film productions through recent mergers, and expansion into other markets to increase revenues. Its threats are other competitors in the entertainment industry, such as Time Warner, as well as inevitable losses when faced with financial crises. The three ratios that are analyzed for the Disney Company over historical fiscal years demonstrate that Disney is performing well compared to its competitors and the industrial average. Disney is an undervalued company, with an intrinsic value consistently higher than its market price. Disney’s net cash flow also demonstrates how the company is effectively using its money supply to increase revenues in the long run. Disney’s qualitative and quantitative factors meet all of my proposed criteria for investment. I recommend that an investor invest in Disney for long and/or short run returns, and such an investment should be made as soon as possible immediately in order to reap the maximum amount of benefits.

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INTRODUCTION Statement of Purpose This report will provide information regarding the financials and relevant background information for The Walt Disney Company, in order to allow investors to make an informed decision about investing in this company. It will also provide a recommendation to investors. Introduction of Company The Walt Disney Company is a publicly traded company, founded in 19231 by Walt Disney. The company began as a silent animated film producer, creating Mickey Mouse as Disney’s first iconic character. Just a few decades later, the company began producing more and more films, all with sound and color technology. In the mid-20th century, Disney opened its first park attraction in California called Disneyland, which was based on Disney’s television series of the same name. Since then, it has opened parks across the U.S. and overseas. Over the course of 90 years, Disney has gone from humble beginnings to being a multi-billion dollar company that is a leader in the entertainment industry. The Disney Company has the following four major sources of revenue: Studio Entertainment, Parks and Resorts, Media Networks, and Consumer Products, all of which are intended to create wholesome family entertainment2. These categories are mainly marketed towards the average middle class American family, but they have expanded greatly to audiences overseas. Disney’s characters have been the most widely recognizable icons for decades, giving the corporation a competitive advantage in the animation and media field. Disney has remained stable during its existence, both in reputation and finances. Criteria for Investment When making an investment decision regarding the Walt Disney Company, one should consider criteria based on qualitative and quantitative factors. Criteria for a good investment is as follows: a strong corporate management team, operation that is in alignment with the values of the founder, ability to keep investor confidence through stable financial standings, and ability to grow in national and international markets. To assess the Disney Company using these four criteria, we will look at financial ratios and financial statements, as well as qualitative aspects of the company in its past and present. Road Map This report will provide relevant background information on the financials and history of the company. There will be a qualitative analysis that provides information on Disney’s management, mergers, mission, values, and opportunities for growth. This section will feature a SWOT analysis, comparing the strengths, weaknesses, opportunities, and threats/competitors of the company. It will also include a marketing mix, describing Disney’s products and services, as well as their positioning, promotions, and pricing tactics. The next major section will be a

1 "The Walt Disney Company History." International Directory of Company Histories 63 (2004): n. pag. History of The Walt Disney Company – FundingUniverse. St. James Press. Web. 03 May 2013. 2 Adamo, Marilyn. "Bob Iger: Disney's Fun King." Fortune Management Career Blog RSS. Fortune Magazine, 21 May 2012. Web. 02 May 2013.

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quantitative analysis that will provide 3 years of financial analyses, complete with price-to earnings ratio, a debt-equity ratio, a price/earnings to growth ratio, and an intrinsic value analysis. This section will also include an analysis of the net cash flow balance, taken from the Statement of Cash Flows for Disney’s last three fiscal years. There will also be a financial analysis of the four major sources of Disney’s revenue. The report will conclude with a recommendation to investors, reiterating important information from this report that would demonstrate the benefits of investing in Disney. QUALITATIVE ANALYSIS Management and Mergers Disney’s success has taken different turns based on its management executives over the past several decades. Disney’s current CEO, Robert Iger, had served as COO for the ABC Network, and then for Disney, once Disney acquired ABC as a subsidiary3. He had the experience and credibility necessary to be appointed to CEO in 2005, and it was Walt Disney’s son, Roy Disney, who appointed him. Iger was able to put Disney back on the right track after the 2008 economic crisis4. He decided to invest in capital during the recession, when other companies in the entertainment industry were cutting back. Disney’s stock prices increased to higher levels than the company had seen even before the recession, going from under $20 per share in April 2009 to over $60 per share in April 20135. Under Iger, Disney has acquired Pixar, and with that, Steve Jobs became Disney’s top shareholder, giving him a seat on Disney’s board of directors until his recent death. Disney also acquired Marvel Entertainment, allowing it to produce much-anticipated films like Iron Man 3 and The Avengers, with the latter having grossed $1070 million globally6. Since Iger’s appointment to CEO, he has been named as one of Fortune magazine’s “25 Most Powerful People in Business” in 2006 and 20077. Iger has made some very unusual but very forward thinking decisions when he decided to go through with these acquisitions. Many questioned his decisions, since they strayed from the way Disney had always operated. However, his creative destruction attitude resulted in some of the best decisions for Disney. By working successfully with Pixar, a different type of animation studio, Iger let his critics and audiences know that “no longer was the Disney way the only way.”8

3 "Robert Iger." Forbes. Forbes Magazine, n.d. Web. 03 May 2013. 4 Adamo, Marilyn. "Bob Iger: Disney's Fun King." Fortune Management Career Blog RSS. Fortune Magazine, 21 May 2012. Web. 02 May 2013. 5 "Walt Disney Company (The) Commo (NYSE)." Chart. Yahoo! Finance. Yahoo!, n.d. Web. 3 May 2013. 6 Finke, Nikki. "‘Avengers’: $400M In 14 Days Sets New Domestic Speed Record; #6 All Time Highest Grossing Film." Deadline.com. Deadline Hollywood, 18 May 2012. Web. 03 May 2013. 7 "Robert A. Iger, Chairman and Chief Executive Officer." The Walt Disney Company. The Walt Disney Company, n.d. Web. 02 May 2013. 8 Adamo, Marilyn. "Bob Iger: Disney's Fun King." Fortune Management Career Blog RSS. Fortune Magazine, 21 May 2012. Web. 02 May 2013.

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Mission and Values Although large corporations like Disney must focus on finances, this company does not stray from its original values. The iconic Mickey Mouse began as a character that could always make people laugh, and would always have a positive attitude even when faced with trouble. Walt Disney faced many hardships, such as financial troubles during the Great Depression, but him mission was to make people smile and feel young again through watching his cartoons9. His intention when starting his company was to make people laugh, bringing together people of any age or background. His mission statement was “Dream, diversify, and never miss an angle.”10 He never wanted to stop innovating and dreaming, and always keep moving forward. Today, the company promotes its products and services as “magical”, tying into Disney’s original values. Disney still uses the iconic Mickey Mouse ears logo on its products, advertisements, and television programs. The company’s mission statement today is as follows: “The mission of the Walt Disney Company is to be one of the world’s leading producers and providers of entertainment and information. Using our portfolio of brands to differentiate our content, services, and consumer products, we seek to develop the most creative, innovative, and profitable entertainment experiences and related products in the world”11. The company has expanded greatly since its conception, but still keeps in mind the values of creativity and innovation that Walt Disney had when he began his work. International Expansion Currently, only 25% of Disney’s revenue and profit comes from international markets, and only 10% is from markets that are outside of Europe12. Disney has already expanded its theme parks to places like Paris and Japan, and opens its feature films in theaters across the world. However, based on these statistics, Disney has a lot more growing that it can do, and fortunately for them, many more international markets are becoming stronger and less risky. Brazil, Turkey, and Colombia have seen recent increases in the amount of revenue generated by advertisements, which means that companies like Disney could see a lot of increased profits from these markets. Disney has the capacity to expand further, and needs to do so at a fast pace, as competitors have already begun moving into these growing international markets. Time Warner is licensing more TV shows internationally, broadcasting shows like a Chinese adaption of Gossip Girl13. Disney has already made similar moves to attract international audiences, but these developing markets are creating potential for further expansion. Disney has the experience and resources necessary to capitalize on these opportunities, but so do many other competitors, therefore timing is crucial when it comes to international expansion.

9 McGaffin, Timothy. "Mickey Mouse - A Reflection of Walt Disney."Ezinearticles.com. Ezine Articles, 12 June 2007. Web. 2 May 2013. 10 Millbower, Lenn. "Walt Disney Demonstrated How Companies Can Innovate within Their Core Strengths." Examiner.com. Examiner.com, 11 July 2012. Web. 02 May 2013. 11 "The Walt Disney Company." : Chapter 1: Brief History & Mission Statement. The Walt Disney Company, 12 Sept. 2011. Web. 02 May 2013. 12 Brown, Abram. "Disney Has Ample Opportunity For Emerging Markets Expansion.” Forbes. Forbes Magazine, 26 Sept. 2012. Web. 03 May 2013. 13 Ibid.

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Marketing Mix The way that a company markets its products can be the difference between a failed or successful company. Since there are many aspects to consider within marketing, a useful tool to help organize information is a Marketing Mix. It divides company marketing information into products, positioning, promotions, and pricing. Disney is able to produce a multitude of products to go along with new characters, films, and television programs it creates. From merchandise to cruise ships, Disney creates every material thing that it can possibly put its logo on. These products and services are sold nationwide as well as globally, targeting diverse audiences of children. As such, Disney’s positioning is very strategic. The company’s focus “has switched to fewer, bigger franchises on more platforms and with longer merchandising tail”14. Disney’s iconic characters are plastered all over the sides of the company’s massive cruise ships and tour buses. Commercials for Disney parks and vacations target and shape the emotions of the viewer. Disney knows where to put its name and how to make consumers believe that a Disney vacation is one that no other company can offer. In addition the parks and resorts, the company franchises retail stores in malls, as well as operating larger stores in major cities15. Gift shops are also numerous within Disney’s parks and resorts, strategically placed at the end of rides so consumers will be more likely to purchase the products. These products and services are marketed as a way to preserve the magic and memories associated with the Disney vacation. Disney is able to promote its name and brands through its films and other media, merchandise, theme parks, and other forms of advertising, creating a ubiquitous presence. They target a specific audience, namely children and families from middle class income backgrounds. Disney’s promotions are consistent with its target audience’s values and economic standings. Promotions usually include vacation, airfare, and hotel packages and discounts that entire families can take advantage of, as well as special promotions for kids. Disney’s pricing also remains constant with their target audience, and prices of Parks and Resorts fluctuate by season to maximize profits. Disney operates under a low-cost strategy, keeping prices low while still producing quality goods and services16. SWOT analysis A very useful tool when looking at many different aspects of a company is the SWOT analysis. This tool breaks information up into four main categories of strengths, weaknesses, opportunities, and threats. By comparing these categories, an investor can effectively weigh the pros and cons of the company to make an investing decision. Strengths Disney possesses many strengths that have made it a very profitable company, ranging from marketing tactics to creativity. The Walt Disney Company owns widely recognized subsidiary

14 Murray, Ingrid. "Disney: Brand Magic." Web log post. Competitive Advantage. Blogspot.com, 15 Jan. 2009. Web. 03 May 2013. 15The Walt Disney Company. Disney Consumer Products. N.p.: Walt Disney, n.d.Disneyconsumerproducts.com. The Walt Disney Company, 2012. Web. 2 May 2013. 16 Mattheij, Jacques. "The Walt Disney Company-a Case Study." The Walt Disney Company-a Case Study. Reocities.com, 2009. Web. 02 May 2013.

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brands such as ESPN, ABC, Pixar, and Marvel. The Marvel brand has recently produced popular films such as The Avengers and Iron Man 3. Pixar also continuously produces popular animated films, such as Toy Story, Finding Nemo, and Cars. Some of these animated films have even won Academy Awards. The company’s revenue streams from multiple product lines, such as merchandise, theme parks and resorts, TV and film entertainment, and more. Its financial growth has also been consistent, showing strong numbers even during financial crises. The Disney Company is a leader in innovation and creativity, allowing viewers not only to experience the magic of a film on screen, but in real life as well, through their theme park attractions. The company also still follows its creator’s vision, staying in line with the values and innovation that made Disney such a success in the first place. As mentioned before, Walt Disney’s formula for his company was “Dream, diversify, and never miss an angle.”17 His attitude of always thinking in terms of creative destruction kept the Disney Company successful while he was alive, and even after. He was firm in his own beliefs, and he instilled them in those who worked for him so that the company could continue to function with his values in mind. Weaknesses Disney faces weaknesses that it must overcome to stay relevant in the market. One of Disney’s weaknesses is that that it spends large amounts of money developing new films with new characters, without much guarantee that these will be well-received by audiences or generate expected levels of revenue. Acquisitions and mergers with large film studios such as Pixar are always met with skepticism because of the risk involved in these multi-billion dollar endeavors. Recently, Disney produced its largest flop in its recent movie history. John Carter, based on popular novels by the author of the Tarzan books, left Disney with $200 million in debt after producing this expensive film18. Also, the fact that Disney is so large and influential of a company means that any mistake or scandal poses the risk of damaging its iconic reputation forever. The company is an iconic brand for wholesome, family entertainment, which leaves little wiggle room when trying to expand its movie content to try to attract a larger audience. Additionally, since Disney’s products are entertainment based, a severe financial crisis would have consumers choosing necessity over entertainment, and Disney could begin to see a drop in revenue. Opportunities A recent opportunity that Disney is taking advantage of is producing the 7th, 8th, and 9th installment of Star Wars, to be released in a next few years. Disney is always on the lookout for lucrative acquisitions, and the recent acquisition of Lucasfilm will make the Star Wars productions possible19. Earnings from consumer products alone are expected to be around $215 million, once the next installment is released in 2015.20 Additionally, revenue from merchandise

17 Millbower, Lenn. "Walt Disney Demonstrated How Companies Can Innovate within Their Core Strengths." Examiner.com. Examiner.com, 11 July 2012. Web. 02 May 2013. 18 M., O. "Disney's "John Carter": The Biggest Flop Ever?" The Economist. The Economist Newspaper, 23 May 2012. Web. 02 May 2013. 19 Leonard, Devin. "How Disney Bought Lucasfilm—and Its Plans for 'Star Wars'"Businessweek.com. Business Week, 07 Mar. 2013. Web. 3 May 2013. 20 Karp, Michael. "The Galaxy Far, Far Away: Happily Ever After?" Weblog post.DayOnBay.com. DayOnBay, 11 Apr. 2013. Web. 03 May 2013.

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and new theme park attractions from these future films will add to Disney’s success. Disney has always proved that its merger and acquisition decisions are worthwhile, producing numerous high-grossing animated films. Disney’s successful characters and stories can be milked for all they are worth, as Disney has been known to produce multiple sequels and spin-offs of their original films and TV shows. Disney is confident in its endeavors, and is always willing to pay top dollar to make acquisition opportunities possible. On the international level, Disney has many opportunities to expand further overseas. The company already broadcasts many of its films overseas, and has already created theme parks in Tokyo, Paris, and Hong Kong21. As international interest grows, Disney can capitalize on this by building more theme parks and opening more international stores to sell more merchandise. Threats and Competitors Disney operates in a highly competitive market, in which there are several other large competitors that pose threats to Disney’s success. Time Warner produces films and shows similar to Disney’s, and Viacom’s Nickelodeon is a direct competitor of Disney’s television networks. Both of these companies are competitors in the entertainment industry, and will contribute to the financial ratio analyses that we will look at later in the quantitative analysis section. Universal Studios has a theme park in Orlando, Florida that features attractions based on highly popular films, such as the Harry Potter franchise22. The fact that one of Disney’s most popular theme parks is also located in Orlando makes this competition even more direct. Additionally, Disney cannot always assume that each year there will be increased visitors and revenue from their theme parks. As mentioned earlier, economic downturns can drastically affect Disney’s revenue. In 1991, the Persian Gulf War decreased travel to the United States, decreasing the number of visitors23. Entertainment and vacations are not given priority by consumers during economic slumps, and Disney will be forced to see the negative results of future recessions. QUANTITATIVE ANALYSIS P/E Ratio Disney Company Competitor:

Time Warner Industry Average

PE RATIO 20.55

19.34 17.52

Figure 1 – see Appendix A and Appendix F

21 Vaux, Robert. "Disney Theme Parks Around the World." USAtoday.com. USA Today, n.d. Web. 03 May 2013. 22 Barnes, Brooks. "Clash of the Theme Parks." The New York Times. The New York Times, 21 May 2012. Web. 03 May 2013. 23 Mattheij, Jacques. "The Walt Disney Company-a Case Study." The Walt Disney Company-a Case Study. Reocities.com, 2009. Web. 02 May 2013.

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It is important to consider the above ratios when making an informed investing decision about Disney. The price-to-earnings ratio is calculated by the market value per share divided by the earnings per share. Essentially, it is the stock’s market price in relation to the amount of money earned on each share distributed. A higher PE ratio means that investors have positive expectations about the future price of the stock, that it will keep climbing and will remain a good investment opportunity. A price-to-earnings ratio that is less than 19:1 is healthy for a company in the entertainment industry. Disney currently has a ratio of 20.55, which is slightly above the target, but it is still very impressive that a company of this size has maintained this fairly low ratio. It is helpful to compare these ratios to competitors in the same market, as well as the industrial average. A competitor in this industry would be Time Warner, Inc. Their PE ratio of 19.34 is slightly lower than Disney’s, and the industrial average is even lower than Disney’s as well. The ratios are very close in number, meaning investors feel generally optimistic about entertainment industry stocks. The reason that the PE ratio for Disney is slightly higher than the average could be related to the fact that Disney just acquired Lucasfilm, and has plans to use this acquisition to allow new film endeavors, such as the next installments in the Star Wars series24. A large acquisition like this always comes with risk, and investors will be more wary of investing because there is more risk now that this acquisition will not pay off in the long run. In the two fiscal years before this merger happened, Disney had much lower PE ratios of 13.95 for 2011, and 16.33 for 2012 (Appendix C). Disney clearly has a history of having even higher investor confidence, as well as a history of successful mergers, making the acquisition of Lucasfilm less risky than it may initially seem. Debt/Equity Ratio Disney Company Competitor:

Time Warner Industry Average

DEBT/EQUITY RATIO 0.37 0.66 0.59

Figure 2 – see Appendix B and Appendix F The Debt/Equity ratio can be used in addition to the above ratios to determine whether a company would provide good returns on an investment. It is calculated as total liabilities divided by shareholder’s equity. This ratio is used to determine the proportion of a company’s debt to its equity that is used to finance its assets. A healthy ratio of this kind differs in amount based on the industry, but a ratio under 2:1 is generally viewed as healthy for industries that are not capital intensive. As this ratio gets larger, it raises a red flag to investors, as an increasing amount of debt means that there is a greater risk that a company will be unable to pay off this debt. Disney’s ratio of 0.37 is a very healthy level, meaning that for every dollar of equity Disney receives, it has only 37 cents in debt. This shows that Disney has a high amount of investment,

24 Leonard, Devin. "How Disney Bought Lucasfilm—and Its Plans for 'Star Wars'"Businessweek.com. Business Week, 07 Mar. 2013. Web. 3 May 2013.

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and that investors are clearly optimistic about the financial future of Disney. The average for the industry is 0.59, which is higher than Disney’s, but still healthy. Time Warner has a ratio of 0.66, which is much higher than Disney’s, making Disney better off than its competitor. Since these ratios are all still under 2:1, it further demonstrates the stability of the entertainment industry. Disney’s ratios for 2012 and 2011 are 0.39 and 0.36, respectively (Appendix D). The company has been able to maintain consistently low levels of debt relative to equity, which can be linked to their superior management and experience in the industry. PEG Ratio Disney Company Competitor:

Time Warner Industry Average

PEG RATIO 1.21 1.31 1.81

Figure 3 – see Appendix A and Appendix F The Price/Earnings to Growth ratio is another important indicator to look at. This ratio can be an even better indicator than the PE ratio. It factors in the rate of growth of a company, which provides a more detailed look at the company’s worthiness as an investment. This ratio can be calculated as the PE ratio divided by annual earnings-per-share growth. It is better to have a lower ratio that is under 1.5 for a company in this industry. This means that the company is growing rapidly, with shares that are valued lower than they should be, based on the earnings per share. An investor could buy shares at a lower cost, and receive relatively high returns. Disney has been operating with a current PEG ratio of 1.21, putting it on the borderline for having undervalued shares25. Compared to Time Warner and the industrial average, which are 1.31 and 1.81, respectively, Disney has a slightly lower and more desirable PEG ratio. This indicates that, compared to other companies in the entertainment industry, Disney is able to sustain a higher rate of annual growth. This may be a result of the current CEO’s work since he took this position in 2005, giving Disney an annual compounded growth rate of 13%26. Intrinsic Value A supplement to the PEG Ratio would be an analysis of the company’s intrinsic value. The intrinsic value of a company compares the market price to the actual worth of the stock. Examining the intrinsic value will tell an investor if the company is undervalued or overvalued. If the intrinsic value is consistently above the market price or book value in consecutive fiscal quarters, then the company’s shares are undervalued, and the company is too. An investor’s stock would be worth more than the price he paid for it. Unlike the market price, intrinsic value

25 Pour, Soroush. "What Should Investors Do with Disney?" Themotleyfool.com. The Motley Fool, 14 Aug. 2012. Web. 03 May 2013. 26 "Robert A. Iger, Chairman and Chief Executive Officer." The Walt Disney Company. The Walt Disney Company, n.d. Web. 02 May 2013.

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takes into consideration things like trademarks and copyrights. These are often difficult to calculate and are not usually reflected in the market price.

Figure 4

Figure 4 27 shows Disney’s market price and book values relative to its intrinsic values from 2009 to 2012. The intrinsic value has always been around 20-30 points higher than the market value, making Disney much more undervalued, with shares that are worth much more than is reflected by the market price. A quick way for investors to know whether to buy a stock or not is to divide the intrinsic value by the market price, also known as RGV28. If the RGV ratio is over 1, then buying the stock is encouraged. Disney’s RGV has been much larger than 1 over the past few fiscal years. Net Cash Flow Statement of Cash Flows

2012

2011 2010

Net Cash Flow 202,000 463,000

(695,000)

Figure 5 – see Appendix G Net cash flow should also be taken into consideration when making an investing decision, as it demonstrates how a company uses its money during a fiscal year. It’s important to do a trend analysis for a company’s past fiscal years, in order to understand how and why a company spends the way it does. Net cash flow is calculated by adding up the cash flows from operating, financing, and investing activities. If a company is spending more than it is making, then the net 27 "Walt Disney Company's Intrinsic Value Using Intellectual Capital Analysis." Walt Disney Company's Intrinsic Value Using Intellectual Capital Analysis. Attainix Consulting, n.d. Web. 03 May 2013. 28 Jun, Jae. "How to Value a Stock with Benjamin Graham’s Formula." Weblog post. The Value Investing Blog of Old School Value. Old School Value, 01 Dec. 2009. Web. 03 May 2013.

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balance will be negative, which tends to look bad to investors. However there is much more to consider when looking at the ways a company spends its cash. The 2010 negative balance in net cash flows shows that the company is growing rapidly, investing in larger projects that require more cash outflows from investing activities. The reason for this is the Disney Company made major renovations on its Disneyland Resort in California that year. It brought in new attractions and tore down old features, requiring a larger than normal investment and flow of cash. The renovations, while investment heavy, gave Disney more opportunities to have a higher cash flow from its theme parks and resorts in future years. Market Share and Market Growth Disney’s four main categories of revenue all incur different levels of costs, and generate different levels of revenue for the company. It’s important to note the market share and market value levels of each unit. Disney’s four main categories of revenue are Studio Entertainment, Parks and Resorts, Media Networks, and Consumer Products. The company also has revenue from a fifth category, Interactive Media, but this unit is very small and actually is costing Disney more than it makes on it.29 Figure 630 shows the revenue levels relative to operating income for each unit. Disney’s most profitable category is Cable Networks.31 This unit has high-income growth, as well as high market share, since the company owns many media outlets on the radio and on television. Between the years of 2006 and 2007 Disney’s income increased by 1 billion dollars from this unit. Disney’s Studio Entertainment brought in only $5.8 billion in the 2012 fiscal year, with revenue falling by 4.5% in the first quarter of 2012. Its operating costs are high, and cash generation is fairly low compared to the costs. Disney’s Parks and Resorts unit would be considered Disney’s “cash cow”, since this generates the largest amount of revenue for the company, and has very low operating costs compared to its total revenue. Revenue increased 7.5% in 2012,

29 Adamo, Marilyn. "Bob Iger: Disney's Fun King." Fortune Management Career Blog RSS. Fortune Magazine, 21 May 2012. Web. 02 May 2013. 30 Ibid. 31 The Walt Disney Company: Business Description. Rep. N.p.: Walt Disney, n.d. Mergent Online. Web. 3 May 2013.

Figure 6

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and revenue from consumer products also increased32. This unit’s market share is high, but market growth is low, as its operating income between 2004 and 2007 increased only within the millions. One of the smaller but still successful units of revenue generation is its Consumer Products. This unit contributes to the second smallest portion of Disney’s revenue, with low market share, but a low growth rate. A large reason that this unit is so small is that Disney franchises its stores33. Overall, Disney maintains its units well, keeping its operating costs at a level that is conducive to high levels of revenue. Consumer Products and Studio Entertainment may raise the most concern when looking at market share and market growth, but these are outweighed by the highly successful Parks and Resorts, and Cable Networks categories. This information demonstrates how Disney is effectively putting to use its 90 years of knowledge of being in the entertainment and animation industry, but also does have room for improvement. RECOMMENDATIONS Based on the qualitative and quantitative information given in the report, investors should be able to make an informed decision regarding the Disney Company. The aforementioned research into the company’s history and financials supports my recommendation to invest in Disney for short/and or long-term returns. Investors are advised to invest immediately, as there have been no recent downturns in the company’s financial history that would persuade me to recommend waiting to make an investment at a later time. Disney meets all the criteria that I have presented, so investors can be confident that Disney will be a worthwhile investment. Based on the qualitative analysis, Disney meets the criterion of having a strong corporate management team, as seen with Robert Iger’s leadership in the past few years. Iger has worked closely with other animation and film studios to facilitate lucrative mergers. Despite the 2008 financial crisis that took a toll on all companies across many industries, Iger’s steady management swiftly increased stock prices to levels that Disney had not seen even before the crisis. Iger’s many years of experience working for a Disney subsidiary as well as high up in the company before being appointed to CEO shows that he was well qualified for the position. His successful acquisition of Pixar further demonstrates his qualification to manage the company. Disney and its investors can definitely see more success in years to come with Iger at the forefront. Comparing Disney’s current mission statement with Walt Disney’s original views, we can conclude that Disney meets the criterion for operation that in alignment with the values of its founder. If a company has strayed far from its founder’s intentions, you will often find that there is a misalignment of goals and values between the people running it. Conflict may arise and disarray may ensue, resulting in a downward financial trend in the long run. Walt Disney’s intentions were simple: to bring all people together through laughter, and to give them an icon to

32 Ibid. 33The Walt Disney Company. Disney Consumer Products. N.p.: Walt Disney, n.d.Disneyconsumerproducts.com. The Walt Disney Company, 2012. Web. 2 May 2013.

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relate to. Disney has effectively kept these intentions in mind when producing its goods and services, as well as maintaining the iconic Mickey Mouse. Disney has been financially successful through aligning its values with its founder’s values, proving to be a company worth investing in. Disney also possesses the ability to keep investor confidence through stable financial standings, consequently meeting my third criterion. Its financial performance has been consistent with my criteria for a good investment. Disney has a healthy PE ratio that is recommended for a company in this industry. This shows that other investors are optimistic about Disney’s financial future, and a new investor should see this as a good sign about Disney. Disney’s PEG ratio is very close to being 1:1, which demonstrates the high rate of growth for the company. An investor should buy shares of Disney because he can pay a lower price for the shares, but still receive relatively high returns. Disney has an intrinsic value that is considerably higher than its market price, making the company undervalued as a whole; a positive sign to investors. The debt to earnings ratio for Disney indicates that the company does not get deeper and deeper into debt in order to fund its ventures, a good sign for investors who may have been worried that the company would not be able to pay dividends. Lastly, the 3-year analysis of Disney’s cash flows indicate that it uses its money wisely, spending more than usual only when it is certain of financial gain in the future. Lastly, Disney meets my fourth criterion of ability to grow in national and international markets. Disney has been highly successful in the U.S., and expanding into developing international markets could vastly increase Disney’s profits. As mentioned earlier, Disney only receives 25% of its revenue from overseas markets, and there are many developing markets that Disney has not yet explored. Examination of Disney’s ratios and financial statements proves that Disney is functioning as a stable company, and has the resources available to expand. Disney’s has already begun to formulate plans for increased international growth, which should be of interest to an investor. Disney is a powerhouse and an innovator in the entertainment industry, and has been for decades. Disney is embarking on some new endeavors, some of which stray from the classic Disney way. However, in this fast-paced market, it is essential for classic companies to change their mindsets, and keep producing products that keep up with consumer preferences and the latest technology. For these reasons I would strongly advise prospective investors to invest in Disney.

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APPENDIX Appendix A - CSI Market34

Appendix B - CSI Market35

34 "DIS Valuation." Chart. CSIMarket.com. Financial Intelligence Company, n.d. Web. 03 May 2013. 35 "Financial Strength Comparisons." Chart. CSIMarket.com. Financial Intelligence Company, n.d. Web. 03 May 2013.

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Appendix C - CSI Market36

Appendix D - CSI Market37

Appendix E – Stock-analysis-on.net38

36 "DIS Price to Earnings Ratio." Chart. CSIMarket.com. Financial Intelligence Company, n.d. Web. 03 May 2013. 37 "DIS Total Debt to Equity Ratio TTM." Chart. CSIMarket.com. Financial Intelligence Company, n.d. Web. 03 May 2013. 38 "Current Valuation Ratios." Chart. Stock Analysis on Net. Stock Analysis on Net, 2013. Web. 03 May 2013.

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Appendix F - Yahoo! Finance39

39 "Time Warner Inc. Key Statistics." Chart. Yahoo! Finance. Yahoo!, n.d. Web. 3 May 2013.

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Appendix G – Yahoo! Finance40

40 "Walt Disney Company Cash Flow." Chart. Yahoo! Finance. Yahoo!, n.d. Web. 3 May 2013.