The Walt Disney Company - Neeley School of Business

The Walt Disney Company
Rick Settle
Analyst
April 16, 2013
Recommendation:
BUY 3.0% POSITION
Pros:
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Ticker
DIS
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History of Success
Protected Exposure to Many Industries as a
Conglomerate
Dominance in Multiple Industries
Lucasfilm Acquisition
Increasing Dividend Yield
Underweight in Consumer Discretionary
Cons:
Exchange
Industry
NYSE
Entertainment/Media
Sector
Consumer Disc.
Classification
Income & Capital
Appreciation
Market Cap.
52 Week Price range
$108.81B
$41.25-$60.46
Recent Price
$60.32
Current P/E
19.44x
Projected 2015 P/E
14.5
2012 EPS
$3.17
Projected 2015 EPS
$4.87
Dividend Yield
1.30%
Debt Rating
A
Beta
1.11
Altman Z-Score
3.57
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Trading at or Near 52-Week High
High Correlation with U.S., Global, or
Regional Economic Conditions
Dependent on the Existence and
Maintenance of Intellectual Property Rights
Brief Overview1, 2
The Walt Disney Company (NYSE: DIS) is a
conglomerate
entertainment
company
that
operates across many business segments. The
company conducts operations in media networks,
studio entertainment, theme parks and resorts,
consumer products, and interactive media. The
company competes within the domestic and
foreign markets in all of its business segments.
Disney produces motion pictures, television
programs, and musical recordings, as well as
books and magazines. Its Media Networks
segment operates the ABC Television Network
and 8 owned television stations, the ESPN Radio
Network and Radio Disney Network, and 35
owned and operated radio stations. It also
produces and distributes ABC-. ESPN-, ABC
Family-,
and
SOAPnetbranded
internet
businesses. The Park and Resorts segment
owns and operates Walt Disney Resorts
domestically and abroad, along with the Disney
Cruise Line. The company was founded in 1923
and is headquartered in Burbank, California.
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PORTFOLIO CONSIDERATIONS 2, 11
Company Name Ticker
Purchase
Date
Starbucks Corp SBUX 10/31/2012
Vf Corp
VFC
11/16/2009
Number of
Cost
Current
Shares Per Share Price
Current
Market
Value
510
$51.43
$56.11 $28,616.10
220
$107.28 $164.06 $36,093.20
Equity
Holding
Equity
Period
Holding
Equity YTD
Total Return Period Total Total Return
Equity
(%)
Return ($)
(%)
Percentage
23.43%
$6,146.05
6.54%
3.08%
137.00%
$32,333.60
32.36%
3.88%
The TCU Educational Fund currently has two holdings within the consumer
discretionary sector of the portfolio: Starbucks Corp (SBUX) and Vf Corp (VFC). The
EIF has owned shares of SBUX since October 2012 and has realized an equity holding
period total return of 23.43% or $6,146.05. The EIF purchased Vf Corp in 2009 and has
realized a 137% equity holding period total return. Vf Corporation designs and
manufactures apparel and footwear industries through brands such as The North Face,
Timberland, Vans, Reef, and Lee. Starbucks Corp operates as a roaster, marketer, and
retailer of specialty coffee worldwide.
The EIF current target for Consumer Discretionary stocks is 11.60%, we currently
only hold 6.96% of the portfolio in Consumer Discretionary stocks with SBUX and Vf
Corp; Therefore we are 464bps underweight in the Consumer Discretionary sector.
Also, we currently only hold 10.40% in Income stocks and 33.72% in stocks classified
as capital appreciation & income stocks. Our target for Income and Income/Appreciation
stocks is 25.0% and 35.0% respectively. As a whole we are 15.88% under our target of
stocks that pay dividends (when combining income and income/appreciation stocks).
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When a correlation analysis was conducted it was found that VFC has a 0.504
correlation with SBUX, therefore the two stocks are for the most part, not correlated.
With the introduction of DIS to the portfolio, there would be very little correlation
concerns as DIS has a 0.526 correlation with SBUX and a 0.536 correlation with VFC.
In terms of correlation, DIS would be a good fit within the current portfolio as it is not
correlated with our only other two holdings in consumer discretionary and provides us
protected exposure (due to its position as a congolmerate) to many other industries and
sectors.
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Industry Overview2,3,4
As a worldwide conglomerate, The Walt Disney Company operates within multiple
different industry segments. For investment analysis purposes, it is important to analyze
the current trends and themes within each segment that the company competes within.
For this reason, the industries that will be discussed include: the Media Network
Industry, Parks and Resorts Industry, Studio Entertainment Industry, Consumer
Products Industry, and Interactive Media Industry.
The Media Network Industry
Companies that compete within this industry engage in the creation and distribution of
content including audio recordings, films and television programming, and printed
material. Others within the space include companies that own and operate radio and TV
broadcasting stations, as well as over-the-air and cable broadcast networks.
Television Broadcasting in the US
Companies within this $37.6bn industry program and deliver audiovisual content to the
public via over-the-air transmission. This
industry excludes cable and satellite TV
and online content providers. The majority
of the revenue within this segment of the
Media Network is driven by corporate
advertising. Products offered by television
broadcasting companies include
syndicated news, dramas, sports
programing, comedies, syndicated game
shows, local programing, children’s
programs, as well as a small percentage of
other programs.
The industry is in decline due to the unsustainable nature of the business model.
Consumers are increasingly switching to cable TV, which has seen a surge in
popularity, profitability, and revenue. The three largest competitors within the space
(News Corporation, The Walt Disney Company, & NBCUniversal) hold over 45% of the
market. The mandated switch to digital transmission proved costly for broadcasters over
the past 5 years. Although with the costly transition, industry players begin demanding
that cable companies pay a fee for retransmitting broadcasters’ programming. As 90%
of households with televisions subscribe to cable, these fees enable companies within
this space to continue to generate revenue.
Cable Networks in the US
The Cable Network Industry within the United States is a mature industry that has seen
an increased amount of consolidation in recent years. It is a $15.9bn industry that has
seen annual growth around 1.7% from 2008-2013 and is expected increased growth
(2.9%) for the next 5 years. A trend within the industry has been new networks with
increasing channel offerings that have led to a larger number of consumers who are
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willing to pay for the additional content to their existing subscriptions. Rising disposable
income will enable consumers to spend more on services within the industry in the
years to come. One major roadblock of the industry is increasing competition from other
media outlets, most importantly, online streaming TV, which is cannibalizing traditional
TV viewership. To compete with these online streaming companies, cable network
providers are increasing their product offering and focusing on improving their website
development, social media interaction, and application technologies. The goal of the
cable networks is that they will be in constant contact with their consumer.
Revenues within the
industry are largely driven
by national and regional
advertising, which makes
up 33.6% of the industries
revenue. The other main
driver of revenue is
specialty TV program licensing which accounts for 26.8% of the revenues generated
within the industry; together the two make up nearly 60% of the revenues of the cable
network business. Some key economic drivers for the industry include the rising per
capita disposable income of consumers, amount of consumer time spent on leisure and
sports, technological change within the industry, and total annual advertising
expenditure. An important note to discuss is that the Cable Networks do not provide the
service directly to the end consumer, but rather to the Cable, Internet, & telephone
Providers and Satellite Telecommunications Providers, who in turn sell their content
packages to the end-consumer. This is important as occasionally you will see rifts the
content provider and service provider on pricing and content (Ex: This caused the
inability to watch TCU football games on MTN (The Mountain) for many years if you did
not have the cable service provider in Fort Worth that offered MTN); Meaning that the
service provider will contest rate increases or price changes of the content and will
either demand a pricing change, or choose to not include the cable network in their
offerings to the end consumer. In most circumstances, the content provider is able to
win the battle if their content is widely demanded by the end consumer (aka ESPN).
Parks & Resorts Industry
Amusement Parks in the US
Theme park companies operate mechanical rides, water rides, games, shows, themed
exhibits, refreshment stands and other attractions within the United States. This
$13.0bn industry is driven primarily by the state of the economy and travel-related
spending trends. With the decline of the domestic
economy (and global economy) in 2009, many players
within this industry experienced a large decline in
visitors as the economic downturn caused consumers to
be more selective of how they spent their discretionary
income. In 2009, 5.2% fewer people visited the United
States theme parks than in 2008. Due to the improving
economy since the recession, consumer spending has
driven an increase in park visitors. This trend is
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expected to continue with expected growth in consumer spending (1.9%), international
arrivals (6.1%), and domestic trips (1.8%). Many players within the space are expanding
internationally to minimalize their dependence on the highly saturated US market and
take advantage of the fast-growing economies like China and Dubai. With the improving
domestic economic situation and growth potentials internationally, industry revenue is
anticipated to rise at an annual rate of 2.4%.
Business trends within the industry include complementary business
developments, taller, faster roller coasters, and debit card payment systems. As the
majority of amusement parks nationally are on large plots of land, there is room for
amusement park operating companies to expand into other complementary businesses
such as resorts, movie theaters, hotels/motels, golf courses, lakes, and beaches. This
trend has been very common for parks that are open year-round. Consumers are
demanding bigger and better coasters, and in order to entice visitors to the parks,
amusement park companies are building them. It goes along with the old mantra, “Build
it and they will come.” Although debit-card like processing systems are costly to install,
about 90% of newly built entertainment centers and arcades are being build with these
technologies. This type of system allows the elimination of gaming tokens, which were
costly to produce, and enables the amusement company to collect more data on their
patrons. Companies with these debit and pre-paid card systems have seen an
increased profit from the “float” (unused money) left on the pre-paid game cards. A
growing opportunity within the space is the use of mobile apps and online technologies
to help parks become more efficient and interconnected with their visitor. These
technologies will enable the amusement company to automate some tasks, provide wait
time and planning data to visitors, and generate reports for employees while they are on
site.
Resorts
Companies within this industry operate short-term lodging facilities, including hotels,
motels, and resort hotels. The global tourism industry generates about $1 trillion in
sales, according to the United Nations World Tourism Organization. The US hotel,
motel, and resort industry consists of about 40,000 companies that operate about
50,000 properties and generate combines annual revenue of about $130 billion.
Moderate growth is expected in the years to come. This industry is one that is highly
fragmented; the 50 largest companies generate about 45% of the revenue. Major
industry product lines are fees and sales of food, alcoholic drinks, and merchandise.
Room fees account for nearly 75% of the industry revenue.
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Some major trends within the industry include consolidation, increased corporate
services, green initiatives, and a rise in the number of boutique hotels. By providing a
wider array of corporate services such as technical support for meetings, catered
functions, printing, computing, and copying, resorts are looking to build and develop a
better relationship with their corporate consumers. With customers growing
environmental concerns, the hotel industry is developing many green initiatives.
Conservation efforts, such as washing linens only on customer request have been an
evolving trend in the industry.
Movie & Video Production
The industry produces and distributes motion pictures and videos. The industry
generates $29.3bn worth of revenue annually. This industry has weathered the
recession-related challenges that have occurred over the past 5 years (-2.8% growth
08-13), but is expected to have healthy growth (2.5%) for the next five years.
Aggressive implementation of 3-D technology has helped boost industry revenue 4.7%
in 2010 alone. The lack of availability of funding for movie production slowed industry
growth during the US recession, but through consolidation, large companies have been
able to benefit from economies of scale. Consolidation (Disney’s Lucasfilm & Marvel
acquisitions), have decreased the number of firms competing within the industry. Over
the next five years, we can expect online revenue to play a growing role within the
industry. With the improving economy, the industry will benefit from increasing growth in
personal disposable incomes, which will boost consumer spending within the industry.
Action and adventure films hold
the largest percentage of the
market make-up at 46.7%,
which is followed by a distant
second with comedy films
(21.9%). This industry is a very
mature industry that is currently
undergoing some major shifts.
First and foremost,
technological change is altering
all facts of the industry.
Advances in the equipment and
storage increasingly improve
the resolution of the movies
being produced and watched. In addition, 3-D movies have stimulated box-office and inhome movie watching technology demand. Demand for movies have remained steady
during the past five years, but the ways in which they are watched have changed
dramatically. High-quality resolutions are becoming more prominent, and online sales
and streaming video are displacing physical movie sales. VHS has become virtually
extinct and the transition from DVD to Blu-ray has been slower than expected due to
increased production costs of producing Blu-ray discs relative to DVD’s. Products like
the iPad and other tablets have been a large reason for the transition in movie watching
tendencies.
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Other
For our investment purposes, I have classified the consumer products industry and
interactive media segments as other industries, as these are the two smallest segments
of Disney’s business that we are analyzing. Both are growing industries that are highly
correlated with consumer spending and individual disposal income. These industries are
widely diversified in their product offerings and can include a wide range of products.
For this reason, I have classified these industries as “Other” for our analysis as they are
not a key focus of the investment thesis.
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PORTER’S FIVE FORCES 3,4
Threat of Competition: MEDIUM/HIGH: DIS operates within very mature industries
that are, for the most part, highly consolidated. The major players within the industries
are well diversified and proven. For this reason, there is a very high level of competition
between the companies within the specific sectors. As Disney is a conglomerate, there
is little to no competition across the number of industries that the Company competes
within. For this reason, companies that compete across multiple industries can leverage
their branding and decrease competition. Across the multiple industries that were
discussed above, the top 4 or 5 companies dominate nearly 50% of the market. Among
those 4 companies, the level of competition is very high.
Threat of New Entrants: MEDIUM: The threat of new entrants is medium as although
there are major players within the different industries, there are smaller players entering
the markets with lower cost structures and reach. For example, within the hotel industry
and resort industry, although there are major players such as Hilton and Marriott that
dominate a large market share, there are an increasing amount of boutique hotels that
have entered the market as of late. These hotels are more regional in focus, and are
less capital intensive to start up the brand. The same can be said in the movie and film
production business. In this business, although there are many household brands
competing for market share, small companies are continuing to enter the market with
low-budget films that are becoming competitive. With the advancements in technology,
smaller corporates are becoming able to enter the market and become competitive.
Threat of Substitutes: MEDIUM: While there are very few direct product substitutes,
since the industries are all consumer discretionary, there are many substitutes that fight
for the dollar in the consumer’s wallet. What I mean by this is that while there are few
substitutes for hotels/motels/resorts, other than of course staying at home, that there
are other things that consumers can do for fun rather than travel and stay at a resort,
therefore such things as movies, shopping, etc. could in fact be considered substitutes
for the many different product offerings for The Walt Disney Company. That beings said,
within the more specific industries, within the cable network industry, there is some
substitutes for the types of channels that cable providers can choose to purchase from
the cable network suppliers, but there are few that have no substitutes, such as ESPN.
Although there are other sports channels, there is no substitute for ESPN.
Power of Suppliers: LOW: As a conglomerate, the Company has vertically integrated
in the majority of the industries; therefore the power of suppliers is low. There is a
decent amount of suppliers that have some power, such as celebrity agents in the
movie and production businesses, that have some leverage over contracts, but
ultimately when dealing with large companies that dominate the movie production
business, their level of power is relatively low.
Power of Buyers: HIGH: The buyer has a very high level of power within the consumer
discretionary sector as the buyer always has the power to simply not purchase anything.
The product offerings in all of the industries are all desires, rather than necessities.
What is meant by this is that if the consumer is strapped on cash, or does not have
desire to spend money, there is no need for them to go on vacation, spend on cable
networks, take a cruise, or go to the movies.
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0
COMPANY OVERVIEW2,3,4,5,6
The Walt Disney Company
The Walt Disney Company (NYSE: DIS) is an American diversified multinational mass
media corporation. The company, which is more commonly known as simply, Disney, is
headquartered in Walt Disney Studies, Burbank, California. The company is the world’s
largest media conglomerate in terms of revenue. The company is best known for the
products of its film studio, the Walt Disney Studios, but the company also owns and
operates some more well-known brand names such as ABC broadcast
television network, Disney Channel, ESPN, A+E Networks, LifeTime,
and ABC Family. The company also runs 14 theme parks around
the world.
Business Segments
Media Networks
Cable Networks
Disney’s cable networks include ESPN, Disney Channels Worldwide, ABC
Family, and SOAPnet. The cable networks group produces its own programs or
acquires the rights from third parties to air television programs. These networks derive a
majority of their revenues from fees charged to cable, satellite and telecommunications
services providers for the rights to deliver programming to their customers and
networks. The amount that can be charged largely depends upon the competition and
the quality and quantity of the programming that Disney can provide. Disney owns
perhaps its greatest asset in ESPN, one of the most widely demanded sports
programming network. See below for a table of estimated subscribers:
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Broadcasting
The Company’s broadcasting business includes the ABC Television Network
(ABC), ABC Studios, Television Distribution and Domestic Television Stations. ABC has
affiliation agreements with 239 local television stations reaching 99% of all U.S.
television households. ABC produces its own programs as well as purchases from thirdparties the right to show other material on their program. Primetime programming
developed either by their studio or purchased from third-parties include such shows as:
Army Wives, Criminal Minds, Grey’s Anatomy, Private Practice, Cougar Town, and
Nashville, among others. This segment of the business also includes talk shows such
as Good Morning America, 20/20, The View, The Chew, and Nightline. Details for the
stations Disney owns is as follows:
The company also owns approximately 32% of Hulu, a business that aggregates
television and film entertainment and other content for consumer viewing on the
internet.
Parks & Resorts
Parks & Resorts
The company owns and operates the Walt
Disney World Resort in Florida, Disneyland Resort in
California, Aulani (A Disney Resort & Spa in Hawaii),
The Disney Vacation Club and has ownership interest in
Disneyland Paris (51%), Hong Kong Disneyland Resort
(47%), Shanghai Disney Resort (43%), and licenses the
operations of the Tokyo Disney Resort in Japan.
Disney Cruise Line
The cruise line operates out of ports in North America and
Europe and has a fleet of four ships currently: Disney Magic,
Disney Wonder, Disney Dram, Disney Fantasy. Many of the cruise
vacations include a visit to Disney’s Castaway Cay, a 1,000-acre
private Bahamian island.
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Studio Entertainment
Theatrical Market
The Company produces both live-action films and full-length animated films. As
of September 29, 2012, Disney has released domestically approximately 980 full-length
live action features and 90 full-length animated features. These films are distributed and
marketed principally through their own distribution and marketing companies within the
United States theatrical market. Films that are released in the U.S. may be released
simultaneously in the international markets or experience up to a 4 month delay.
Home Entertainment Market
Domestic and international home entertainment distribution begins typically three
to six months after the theatrical release in each market. These can come in the form of
either physical (DVD and Blu-ray) and electronic formats. Titles are generally sold to
retailers (Walmart, Bestbuy, Netflix, Redbox, etc.). As of September 29, 2012, Disney
has approximately 1,400 active produced and acquired titles, including 1,000 live-action
titles, and 400 animated titles.
Television Market
Concurrently, or up to one month after the home entertainment distribution
begins, Disney’s movies are licensed for use on a PPV/VOD basis to Movie and Cable
Providers, gaming consoles, internet, and mobile platforms.
Consumer Products
This segment of the company handles the
merchandise licensing operations for a wide array
for products which include: toys, apparel, home
décor, stationary, accessories, food, footwear,
consumer electronic, among others. Disney
licenses characters from its film and television for
use by third-parties products in which Disney
earns royalties. Anything that is sold with one of
Disney’s characters (Mickey Mouse, Cars, Toy
Story, etc.) is licensed through this segment. Also
included within the Consumer Products are the
publishing and retail parts of Disney’s business.
Disney subsidy, Marvel Publishing, also published
comic books under this segment.
Interactive
The Interactive Games segment creates, produces, and distributes console
games and handheld games worldwide. This segment includes the online games that
are produced by the Company. Interactive derives revenues from a combination of
wholesale sales, licensing, advertising, sponsorships, subscription services, and ingame accessories. The segment also manages the Disney-branded mobile phone
business in Japan.
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Company History
In early 1923, Kansas City animator Walt Disney created a short film entitled Alice’s
Wonderland. After creating the short firm, Walt moved to Hollywood to join his brother
Roy. O. Disney. The original short firm was purchased for $1,500 per reel. That same
year, Walt and his brother Roy Disney formed Disney Brothers Cartoon Studio. In
January 1926, the Disney Brothers Studio’s name was changed to the Walt Disney
Studio.
After a failed all-cartoon series entitled Oswald the Lucky Rabbit, Disney came
up with the idea of a mouse character named Mortimer. The mouse was later renamed
Mickey Mouse, and the rest is history. Disney produced its first sound film, Steamboat
Willie, on November 18, 1928 at the Colony Theatre in New York. This was also the first
appearance by Minnie Mouse. Riding on the success of
the introduction of Mickey Mouse, Disney began
production of his first feature-length animation film in 1934.
Snow White and the Seven Dwarfs, premiered in
December 1937 and became the highest-grossing film of
that time by 1939. With the profits from the movie, Disney
financed the construction of their studio complex in
Burbank, California. The following year, Walt Disney
Productions had its first initial public offering. The studio
continued releasing animated shorts and features, such as
Pinocchio (1940), Fantasia (1940), Dumbo (1941), and
Bambi (1942).
On October 1, 1949, Walt Disney Music Company
was formed. The company’s fist completely live-action feature, Treasure Island, was
released. In December 1950, Walt Disney Productions and The Coca-Cola Company
teamed up for Disney’s first venture into television, the NBC television special, An Hour
in Wonderland. In October 1954, the ABC network launched Disney’s first regular
television series, Disneyland, which would go on to become of one of the longestrunning primetime series of all time. The Emmy Award-winning show starred no other
than Walt Disney himself.
On July 17, 1955, Disney opened its first amusement park, Disneyland, in
Anaheim, California. Despite a shaky start, the amusement park eventually took off and
is still in operation today. The park introduced the first monorail system to the United
States. Later that year, in October, the Mickey Mouse Club debuted on television. While
they ventured into the amusement park business, the firm studio stayed busy as well,
producing a number of popular films including: Lady and the Tramp (1955), Sleeping
Beauty (1959), One Hundred and One Dalmatians (1961), and Disney’s most
successful film of the 1960’s, Mary Poppins. The movie was one of the highest grossing
movies of all time and received five Academy Awards.
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On December 15, 1966, Walt Disney died of complications relating to lung
cancer at the age of 66, but his legacy would still prosper,
even to today. After the death of Walt, Roy Disney took over
as chairman, CEO, and president of the company. On
October 1, 1971, Walt Disney World (named in honor of the
great Walt Disney), opens with the Magic Kingdom and two
hotels near Orlando, Florida. Roy O Disney, co-founder of
The Walt Disney Company passed away on December 20,
1971. The company was left under the control of Donn
Tatum, Card Walker, and Walt’s son-in-law Ron Miller, each
of whom were trained by Walt and Roy.
Under new management, the company continued its
string of successes with the release of movies such as Robin
Hood (1973) and The Fox and the Hound (1981). On December 3, 1980, ground was
broken on Tokyo Disneyland and three years later, in 1983, the first internationally
themed Disney theme park was opened in Japan, Tokyo Disneyland. While Disney was
expanding internationally, they were also expanding domestically. In October of 1982,
EPCOT Center opened at Walt Disney World, a $1 billion expansion project and in April
of 1983, the Disney Channel began broadcasting with 18 hours of programming a day.
In 1984, Disney CEO Ron Miller created Touchstone Pictures, a brand for Disney to
release more adult-oriented material through. By the early 1980s, the Parks were
generating close to 70% of Disney’s income.
In 1984, the Bass family purchased 18.7% of Disney, and on September 23,
1984, Michael Eisner and Frank Wells become chairman/CEO and president of Walt
Disney Productions. The first ever Disney Store opened in Glendale, California on
March 28, 1987. On May 6, 1991, The Walt Disney Company joined the Dow Jones
Industrial Average, in this same year, the company released The Beauty and the Beast.
A year later, in September of 1991, Hyperion Books, a Disney publishing company,
released its first book, Amazing Grace. Euroland Disney (later renamed Disneyland
Paris) opened in Europe in April of 1992. Disney broadened its adult offerings in film
when the company acquired Miramax Films in 1993.
Disney formed Disney Interactive, a division that complements its movie and
production business by developing, selling, and marketing cartridge games and CD ROM software was formed in December of 1994. On July 31, 1995, Disney agreed to
purchase Capital Cities/ABC for $19 billion; this acquisition was approved and
completed in 1996. This acquisition brought network ABC and its assets, including the
A&E Television Networks and ESPN
networks, into the Disney portfolio. Two
years later in July of 1998, Disney Magic
cruise ship departs on its inaugural cruise.
This would be the start of a growing
business segment of Disney’s. To wrap up
the 1990’s, Disney completed the
purchase of the Anaheim Angels in 1999
(during their period of ownership they
would release the movie, Angels in the
Outfield).
On October 24, 2001, Disney acquired Fox Family Channel and renamed it ABC
Family. A month later, Disney acquired Baby Einstein, a company that creates products
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that are focused on bringing the arts and humanities specifically to babies. The
company sold the Anaheim Angels in May of 2003 to Angels Baseball, L.P. On October
1, 2005, current CEO Robert A. Iger became the president and CEO of The Walt Disney
Company. In late 2005 and early 2006, Disney became the first to license TV episodes
for download on Apple’s iTunes Music Store and the first to offer full-length movies for
sale vie digital download, on Apple’s iTunes platform with High School Musical. Later in
2006, all of Disney feature films would be made available of iTunes. On May 5, 2006,
Disney acquires Pixar Animation Studios.
On Decemebr 31, 2009, Marvel
Entertainment joined the Disney Family. In
2010, Disney realized that continuing
investment in new Miramax movies wasn’t
necessarily a core strategy of theirs, therefore
they sold Miramax in December of 2010 to
Filmyard Holdings for $663 million. On October
30, 2012, Disney announced plans to acquire
Lucasfilm for $4.05 billion with plans of
releasing Star Wars Episode VII in 2015. This
acquisition was approved by the FTC and
finalized on December 21, 2012.
Management
Robert A. Iger is Chairman and Chief Executive Officer of
The Walt Disney Company. Prior to his roles as Chairman,
he served as President and CEO from October 2005, and
President and Chief Operating Officer from 2000-2005. Mr.
Iger joined Disney senior management team in 1996 as
Chairman of the Disney-owned ABC Group. He began his
career at ABC in 1974. Iger has been awarded numerous
honors during his many years of leadership. He has been
named one of Fortune magazine’s “25 Most Powerful
People in Business,” one of the “Top Gun CEOs” by Forbes,
one of the “Best CEOs” by Institutional Investor Magazine.
Robert A. Iger; Chairman/CEO
Mr. Iger joined the Apple board of directors in
November 2011 and became a board member of the U.S.-China Business Council in
June 2011. In June 2010, President Barack Obama appointed him to the President’s
Export Council, which advises the president on how to promote U.S. exports, jobs and
growth.
The Board of Directors includes such members as former President & CEO of
Starbucks Corporation (2000-2005), Orin C. Smith; former President of Global Business
Units of P&G (2007-2009), Susan Arnold; Chairman of Global Affairs of The Estee
Lauder Companies, Fred H. Langhammer; President and CEO of Potbelly Sandwich
Works, Aylwin B. Lewis; current Chief Operating Officer of Facebook, Sheryl Sandberg;
among many other highly respected and highly seasoned business executives.
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Recent Performance 2
The stock of the company has performed remarkably well throughout the past two
years, gaining over 47% in capital appreciation. With that being said, the stock is trading
slightly off its 52-week high of $60.73 at $60.55. This should be a consideration to the
purchasing of the stock which will be discussed below.
The stock has performed considerably well YTD, and is up 18.49%. This is most
likely due to a couple different factors. First and foremost, the entire market has
performed very well YTD (S&P500 is up over 10% and DJI up over 13% TYD), and the
consumer discretionary sector has outperformed the overall market. Secondly, Disney
acquired Lucasfilm at the end of 2012, and consumer sentiment has been very
favorable around the acquisition. The acquisition was announced on October 30, 2012
and later approved by the FTC and finalized on December 21, 2012. Since the
announcement of the acquisition, the stock is up 23.27%, and since the approval of the
FTC, the stock is up 21.10%
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A graph can be seen below for the performance of the stock since the
announcement and approval of the Lucasfilm acquisition.
Approval of Lucasfilm
Acquisition
Announcement of
Lucasfilm Acquisition
Relative to our other two holdings within the consumer discretionary sector,
Disney (DIS) has outperformed both SBUX and VFC. This could be due to the trends
discussed previously, or company specific reasons with our other two holdings. The
chart below shows a 1 year performance for each of our holdings. Something important
to note is that we purchased SBUX in October 2012, therefore we have actually realized
a gain thus far with the position, despite its 1 year underperformance. This chart also
shows the lack of correlation between our two holdings and potential portfolio addition of
DIS.
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RATIO ANALYSIS 1,2, 6,10
Ratio Analysis
Profitability Ratios
Profit margin
Gross margin
ROA
ROE
Liquidity Ratios
Current
Quick
Debt Utilization
Debt to Equity
Interest Coverage
Asset Utilization
Asset Turnover
Inventory Turnover
Valuation Ratios
P/E
Price/Book
Price/Cash Flow
DuPont Analysis
Profit Margin
Asset Turnover
Leverage
ROE
NewsCorp
Time Warner
Industry
2011
10.4%
17.7%
5.7%
10.1%
2012
11.8%
19.0%
6.7%
12.2%
2013
13.4%
21.0%
7.6%
13.5%
(NWS)
11.65%
N/A
5.79%
14.60%
(TWX)
14.31%
45.66%
4.44%
10.09%
Median
10.64%
20.53%
5.92%
10.62%
1.11
0.77
1.14
0.77
1.07
0.77
1.92
1.69
1.35
1.04
1.78
1.2
0.32
14.75
0.35
17.89
0.34
18.78
0.55
5.0
0.66
4.57
0.82
31.06
0.55
34.65
0.57
32.71
0.56
32.01
0.57
N/A
0.42
8.07
0.57
14.16
17.5x
1.77
10.58
14.5x
0.96
9.92
15.9x
2.13
11.21
20.09
2.61
18.4
17.66
1.85
16.42
21.66
3.71
14.34
10.4%
0.55
1.76
10.1%
11.8%
0.57
1.83
12.2%
13.4%
0.56
1.79
13.5%
11.7%
0.57
2.25
14.9%
14.3%
0.42
2.27
13.6%
10.6%
0.57
0.84
5.1%
Profitability: Disney’s has performed exceptionally well in terms of profitability ratios,
as the company outpaces the industry and one of its competitors, Newscorp. While DIS
has a lower profit margin than TWX, it does have a much higher ROA and ROE.
Something to point out is that all of Disney’s profitability ratios are trending upward,
which is a sign of solid growth and is favorable to investment in the company.
Liquidity: Although Disney’s liquidity ratios lag those of their competitors and of the
industry, the company’s debt is rated A by the S&P, and the company has a solid track
record of being able to pay their debts. The company’s liquidity ratios are not a concern.
Debt Utilization: The Company has very low debt to equity levels, which are under
those of their competitors and of the industry median and the companies interest
coverage ratios are way ahead of their competitors, but lags that of the industry, but
since the interest coverage ratio is far about 1.5, investors should have little concern
that they will be burdened by debt expense.
Asset Utilization: The Company is in line with their competitors and the industry in
terms of asset turnover, but far outpaces the competition in inventory turnover. This
could mean one of two things. It could mean that the company has either very strong
sales, or that it is ineffective in borrowing. This ratio doesn’t tell us a whole lot as the
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company is a conglomerate and we cannot point directly to one area that may tell us
which of the two factors it is.
DuPont: The Company has been very successful in generating returns with reasonable
levels of leverage. DIS has outperformed its competitors and the industry average
when it comes to the DuPont analysis. This is a great illustration of the strength of DIS
in comparison to its competitors and the industry as a whole. ROE is trending upward,
which is a favorable sign, as is profit margin.
Valuation: These ratios reveal the strength of DIS and show why it is more valued than
its competitors. The P/E ratio is perhaps one of the best ratios to illustrate this fact. The
P/E of the company is below that of their competitors, which could mean a couple
things: either that the company is cheap relative to its peers or that there are less
prospects of growth. It is difficult to compare DIS to a set group of peers, as the
company competes against a wide range of companies. The price to book is low, which
could show that the stock is undervalued or that there is something fundamentally
wrong with the company (which certainly is not the case), so must mean that relative to
the industry, the stock is undervalued.
Altman Z-Score: With a Z-Score of 3.57, there is no concern of insolvency.
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RECOMMENDATION
BUY 3.0% Position
PROS TO RECOMMENDATION

History of Success: The Walt Disney Company is a household name that has a
long history of success. Despite many changes in management and leadership,
the company has continued to perform considerably well. I see no reason to
suspect that this would change. The company has been long considered as
shareholder friendly and looks to return shareholder wealth through accretive
strategic acquisitions, stock repurchases, and dividends.

Protected Exposure to Many Industries as a Conglomerate: Disney is
considered a conglomerate which gives the EIF portfolio exposure to many
different industries. The current portfolio lacks a stock such as DIS, which
provides the portfolio exposure to multiple different industries. Disney has some
protection to specific industry trends as it is not dependent on the success of one
single industry.

Dominance in Multiple Industries: Within 3 of the 6 industries that Disney
competes in, they hold a high percentage of the market share. Disney holds
15.8% market share in the Television Broadcasting Industry, 16.7% in the Cable
Networks Industry, 19.2% in the Movie & Video Production Industry. Not only
does Disney compete within many industries, it dominates within many
industries.

Lucasfilm Acquisition: With the $4.05 billion dollar acquisition of Lucasfilm,
Walt Disney gives the media giant control of the “Star Wars” franchise. Star Wars
is one of the greatest family entertainment franchises of all time. Disney has
plans to release films during a six-year period starting in 2015

Increasing Dividend Yield: DIS currently has a 1.20% dividend yield which
management has suggested will increase in the coming years. The company has
raised dividend 50% and 25% respectively in 2012 and 2013.

Underweight in Consumer Discretionary: The EIF portfolio is currently 464bps
underweight in the Consumer Discretionary sector.
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CONS TO RECOMMENDATION

Trading at or Near 52-Week High: The stock has been selling at its all-time high
in recent weeks. Simply in terms of timing, it may not be the most ideal time to
purchase the stock given the current run of the overall market YTD.

High Correlation with U.S., Global, or Regional Economic Conditions: Many
of Disney’s business segments are highly correlated with the levels of disposable
income of their customers. The company’s growth slowed during the economic
recession of 2009. If we suspect that the current growth of the economy is
unsustainable and likely to revert any time soon, Disney’s future growth
prospects will be slowed.

Dependent on the Existence and Maintenance of Intellectual Property
Rights: Much of Disney’s business depends upon the current legal regulation in
regards to intellectual property rights. If there were to be changes to these rights,
the company would be adversely affected. Although this is a concern, there has
been no discussion of new legal regulation that could adversely affect the
Company.
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ANALYST RECOMMENDATIONS 10
Analyst Recommendations (S&P Capital IQ)
Strong Buy
Buy
Hold
Underperform
Sell
Total
Current
1 Month Ago
2 Months Ago
3 Months Ago
6
13
10
0
6
13
10
0
6
13
10
0
6
12
11
0
0
0
0
0
29
29
29
29
PROFORMA ASSUMPTIONS
Income Statement
Revenues: Forecasting revenues out into the future, I evaluated the growth prospects
of the industry as well as the historic growth for the company. I broke out the revenues
for the different business segments and forecasted them on a line by line basis. Overall,
my forecasts estimated revenue growth at 6.13% for 2013, 6.77% growth for 2014, and
7.86% for 2015.
Operating Expenses: Operating expenses were modeled as a percentage of top line
growth. Operating expenses historically have proven to be relatively stable in
comparison to growth or decline in revenues.
Taxes: I modeled taxes in the same manner that I modeled operating expenses, using
a 3-year moving average of historical tax expense growth rates. The projected tax
expenses were in line with those of the prior three years.
Dividends: As Disney is end of fiscal year Sept. 29 th, I had a management number for
2013. The company has taken a strong position to continue growing their quarterly
dividend and has grown their dividend Y/Y by nearly 25%. I expect dividend payout to
increase based upon management discussion and a ramp up in dividends in the past 2
years.
CapEx: I brought the capital expenditures down slightly in years 2013, 2014, and 2015.
Although they recently acquired Lucasfilms, I expect them to realize this CapEx across
multiple years, therefore not taking a large CapEx hit in 2013.
Net Debt: Due to the growth capital expenditures of the company, and its aggressive
nature to fund through additional debt, I projected net debt growth based upon a moving
average of a 6 year span dating back to 2006. While this debt will be growing, I also
took into account the repayment of debt that matures in 2012, 2013, and 2014.
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VALUATION ASSUMPTIONS
Risk Free Rate: 2.99%, the current yield on the 30 year US Treasury bond (as of
4/10/2013).
Market Risk Premium: The EIF market risk premium of 5.7% was used.
Beta: The regression that I ran provided a beta estimate of 1.09 which was pretty much
in-line with the other beta estimations. I chose to use a beta estimate of 1.06 which I
felt reflected the amount of risk associated with DIS. My rationale behind this beta
estimate was in large part due to the factor that they are in multiple different markets,
and are becoming more and more diversified, therefore being more and more directly
related to the market.
P/E Multiples: I forecasted P/E ratios as 17.5x, 16.0x, 14.5x for the next three years. I
used the median of analyst forecasts for 2013E as I felt that my forecasts were in line
with many of the analysts. My P/E multiples for 2014 and 2015 are above those of many
of the analysts as I felt that with increased growth and positive street sentiment about
the company’s recent M&A activity that it will drive the P/E multiple up slightly.
EPS: My EPS forecasts are $3.51, $4.08, $4.87 for 2013-2015 respectively. My forecast
numbers are above many of the analysts numbers as I feel that the company will
perform better in the three years to come due to the improving economy and benefits of
recent M&A activity.
Stock Price: I used the stock price as of close on 4/12/13 of $60.55.
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Current Events 7,8
Why The Walt Disney Company (DIS)’s a
Winner, But CBS Corporation (CBS) May
Not Be: Time Warner Cable Inc (TWC)
By The Motley Fool in News
Published: March 13, 2013 at 7:13 pm
The best media companies make strategic acquisitions that diversify across multiple
mediums and target multiple demographics. And no media firm, in my view, is as
successful in doing this as is Disney. Below, I review why Disney's acquisition of
Lucasfilm made sense from a value perspective. I also provide my more negative take
on competitor CBS.
The Walt Disney Company (NYSE:DIS)
Disney's acquisition of Lucasfilm made headlines across all of the major entertainment
and financial journals. While anyone can go out an make an acquisition, when a
company does it, it should help unlock synergistic value. Fortunately, Disney has a
history of developing brands and successful marketing them in films, toys, theme parks,
and television shows. With such a large distributional reach, Disney has more to gain
from Lucasfilm than just the addition of market power. It is not just a "tack-on" buy; it is a
value-enhancing integration that will greatly expand the reach of Lucasfilm products.
To see how The Walt Disney Company (NYSE:DIS) can create value from integrating
Lucasfilm, consider this: Disney recently entered a partnership with Hasbro to create an
Angry Birds version based on Star Wars. And on CNBC, Disney's CEO, Bob Iger,
revealed that the company will launch standalone films involving Star Wars characters.
Fortunately, Disney has a history of executing on executions from Pixar to Marvel.
It also has a history of executing. In the fourth quarter, it beat expectations on both the
top- and bottom-lines. Revenue grew 5% year-over-year and came out $130 million
ahead of consensus. Momentum was felt across nearly all sectors. The company's
weakest point has come from interactive division, which is losing hundreds of millions.
The release of Disney Infinity is aimed at turning the tide. This is a video game launch
that makes use of Pixar characters. One can only imagine what the introduction of Star
Wars characters, which have a history of making for popular video games, will have on
the Interactive division.
CBS Corporation (NYSE:CBS)
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Despite getting top ratings during the Super Bowl, CBS has left many wondering
whether the entertainment company made the most of its ad time. Some felt that it
spent too much time advertising its own programs instead of putting in ads that would
have gone for $3.5 to $4 million per placement.
The Street has also had a relatively tepid outlook on CBS Corporation (NYSE:CBS).
Zacks lists the broadcasting company as “neutral” with a price target of $42. Other
research companies also didn’t raise their ratings. Barclays and UBS are the two
biggest exceptions, which have raised their price targets to $46 and $45 with an
equivalent "buy" rating. But the stock is already at around $43, so there is not much
upside at this point. The stock is also at its 52-week high after rising 53.8% from the 52week low.
With a free cash flow yield of less than 4% and a PE multiple of 18.5, I find CBS
Corporation (NYSE:CBS) relatively expensive. I encourage avoiding the stock,
especially since 5-year has been in the low single-digits and the return on invested
capital is 100 basis points below the industry average.
Closing thoughts & stock fundamentals
Disney has compelling stock fundamentals. Despite being at its 52-week high, it is
reasonably priced at 18.6 times past earnings versus an industry average of 19.5. In
addition, it is generating a decent amount of return on invested capital at 10.9%. 17 out
of 25 reporting analysts rate the stock a "buy" or better, and no analyst rates it a "sell."
Despite my criticism of CBS, it should be noted that it is generating an even higher
return on invested capital at 11.5% for an even cheaper 18.2x multiple.
For a risky value play, I would consider also adding Time Warner Cable
Inc (NYSE:TWC) into the mix. The firm only trades at 13 times past earnings but still
has strong trends. EPS grew by a rate of more than 13% over the past 5 years, and it is
expected to grow by a rate of over 11% over the next 5 years. If these estimates prove
accurate, the multiple will either have to expand right away to generate significant
annualized returns, or the stock will produce, on average, 10%+ annual returns. The
consensus price target is at around a 15% premium to the prevailing price.
How Disney Bought Lucasfilm—and Its Plans for 'Star Wars'
By Devin Leonard
March 07, 2013
One weekend last October, Robert Iger, chief executive officer of Walt Disney (DIS), sat
through all six Star Wars films. He’d seen them before, of course. This time, he took
notes. Disney was in secret negotiations to acquire Lucasfilm, the company founded by
Star Wars creator George Lucas, and Iger needed to do some due diligence.
The movies reacquainted Iger with Luke Skywalker, the questing Jedi Knight, and his
nemesis Darth Vader, the Sith Lord who turns out to be (three-decade-old spoiler alert)
his father. Beyond the movies, Iger needed to know Lucasfilm had a stockpile of
similarly rich material—aka intellectual property—for more Star Wars installments. As
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any serious aficionado knows, there were always supposed to be nine. But how would
Disney assess the value of an imaginary galaxy? What, for example, was its
population?
As it turned out, Lucas had already done the cataloging. His company maintained a
database called the Holocron, named after a crystal cube powered by the Force. The
real-world Holocron lists 17,000 characters in the Star Wars universe inhabiting several
thousand planets over a span of more than 20,000 years. It was quite a bit for Disney to
process. So Lucas also provided the company with a guide, Pablo Hidalgo. A founding
member of the Star Wars Fan Boy Association, Hidalgo is now a “brand communication
manager” at Lucasfilm. “The Holocron can be a little overwhelming,” says Hidalgo, who
obsesses over canonical matters such as the correct spelling of Wookiee and the
definitive list of individuals who met with Yoda while he was hiding in the swamps of
Dagobah.
An Underrated (but Important) Reason to
Buy Disney Stock Now
By Tim Beyers and Erin Miller | More Articles | Save For Later
April 10, 2013 | Comments (0)
Uh-oh. Walt Disney (NYSE: DIS ) is killing part of the Star Wars franchise it acquired in
October for $4 billion. The good news? Like Obi-Wan Kenobi, the dead will rise soon
enough, and in perhaps a more powerful form.
Specifically, Disney has closed 31-year-old game-development division LucasArts and
laid off some 200 employees who worked there, The Wall Street Journal reports. New
Star Wars universe games -- presuming any are under consideration -- will be published
elsewhere.
It's a good move, says Tim Beyers of Motley Fool Rule Breakers and Motley Fool
Supernova in the following interview with The Motley Fool's Erin Miller. Researcher NPD
put LucasArts' revenue at just $55 million last year, down sharply from $175 million in
2006.
What's more, Tim says, Disney is the world's largest brand licensor and as such could
extract good terms from the likes of Electronic Arts (NASDAQ: EA ) and Activision
Blizzard (NASDAQ: ATVI ) , both of which have long, successful histories with
developing games around licensed brands. The possibility of such a deal may help
explain why Disney stock reached another new high this week.
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Are you more bullish on Disney's prospects after seeing this news? What about
Activision and EA? Please watch this short video to get Tim's full take, and then leave a
comment to let us know whether you'd buy or sell Disney stock now, and why.
It's easy to forget that Walt Disney is more than just the House of Mouse. True, Disney
amusement parks around the world hosted more than 121 million guests in 2011. But
from its vast catalog of characters to its monster collection of media networks, much of
Disney's allure for investors lies in its diversity, and The Motley Fool's premium research
report lays out the case for investing in Disney today. This report includes the key items
investors must watch as well as the opportunities and threats the company faces going
forward.
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Sources
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Bloomberg
Yahoo Finance
Hoovers
IBISWorld Global
Thewaltdisneycompany.com
Company Filings
The Motley Fool
Business Week
Google Finance
S&P Capital IQ
Thomson Reuters FirstCall
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