Mutual Investment Club of Cornell
Mutual Investment Club of Cornell
1 MICC The Walt Disney Company
Initial Coverage Updated (October 3, 2014) The Walt Disney Company (NYSE:
DIS)
Expanding media and entertainment giant spreading into new markets and building their influence across a variety of products Company Overview • Headquarters located in Burbank, CA • A market leader in entertainment and leisure activities • Recently acquire LucasFilm and is spreading the reach of their Theme Park division Value Assessment • Currently trading at comps valuation • Revenues due to various acquisitions yet to show full impact • Significant cash available for acquisitions and new product development
Report developed by Kyle Easop, Kenan Mutlu, Kayla Brooks, Jacqueline Torres
[email protected] 631-‐‑252-‐‑3946
Summary of Key Information
The Walt Disney Company NYSE: DIS Multi-‐‑Industry media conglomerate with established presences in entertainment and recreation Rating Hold Market Rating Buy Stock Data (NYSE) Price: $88.45 (October 3, 2014) Market Cap: $151.83B Shares Outstanding: 1,716.5M
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2 Introduction The Walt Disney Company is an international entertainment company founded in 1923. It operates in five different segments: Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products and Interactive. They are headquartered in Burbank, CA and run on a fiscal year from October 1st to September 31st. Notable officers and directors include: Officer Name Title Robert Iger President/CEO James Rasulo CFO Executive VP Corporate Kevin Mayer Strategy and Development John Pepper Chairman Stock Performance Disney has outperformed the S&P 500 consistently over the past three years Over the last three years Disney has returned about 200% while the S&P 500 has only returned about 75%. 3 Year Stock Return S&P 500
Disney
250.0% 200.0% 150.0% 100.0% 50.0% 0.0%
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Investment Assessment We are initiating coverage with The Walt Disney Company with a Hold rating. The Walt Disney Company has been a large player in the entertainment and leisure activities since being founded in 1923. As the worldwide economy continues to improve and disposable incomes continue to rise Disney will take advantage of that and capitalize on the increased leisure spending. Disney is spreading more internationally through all of its divisions, as well as expanding domestically. Due to a wide range of new products in development Disney is poised to continue to increase revenues into the future. With a history of strategic mergers and acquisitions, including Marvel and ESPN, Disney is expected to continue to take advantage of potential new revenue streams and grow shareholder value. Business Summary Disney operates in five main segments: Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products and Interactive o Media Networks: This division owns broadcast and cable television networks and manages television production operations. Revenue is derived from fees charges to cable, satellite, and telecommunications service providers, as well as fees for advertising. o Produces and distributes programs through the ABC Television Network and ABC Studios brans. o Cable networks include ESPN, in which Disney owns an 80% stake; Disney
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4 Channels Worldwide; ABC Family; A&E Television Networks, in which Disney owns a 50% stake; SOAPnet and UTV/Bindass. Also subsidiaries of these networks are owned as well. o Popular shows produced by Disney (through ABC Family) include: Castle, Criminal Minds, Grey’s Anatomy, Scandal, Cougar Town and Jimmy Kimmel Live. o Disney owns a 33% interest in Hulu. o Parks and Resorts: o Domestically, Disney owns and operates Walt Disney World Resort in Florida, Disneyland Resort in California, a Disney Resort & Spa in Hawaii, Disney Vacation Club, Disney Cruise Line, and Adventures by Disney. § Under these resorts Disney owns Magic Kingdom, Epcot, Disney Hollywood Studios, Disney Animal Kingdom, Disney Blizzard beach and Disney Typhoon Lagoon. o Internationally, Disney has ownership in a number of Parks and Resorts including a 51% interest in Disneyland Paris, 48% in Hong Kong Disneyland Resort and a 43% stake in Shanghai Disney Resort. Disney also collects royalties from Tokyo Disneyland. o Studio Entertainment o Produces live-‐‑action and animated motion pictures, music, live plays, and direct-‐‑to-‐‑video content. o Productions are shifting away from independent films and towards highly recognizable and family-‐‑friendly franchises.
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5 o Disney operates under the names Walt Disney Pictures, Pixar, Marvel, Touchstone, and Lucasfilm. o Until 2016 Disney has an agreement with DreamWorks Studios to distribute live action motion pictures via Touchstone. o Consumer Products o Develops and sells a wide range of products based on Disney’s intellectual property. o Revenue is derived from licensing use on intellectual properties to manufacturers, as well as wholesaling children’s books, and selling magazines, games, playing cards and hobby goods. o Operates under the name, the Disney Store. o Interactive o Focuses on producing interactive games across media platforms, as well as licensing intellectual property to other developers. o Popular titles include Disney Infinity, Epic Mickey 2, Club Penguin, Marvel Avengers Alliance, Gardens of Time and Where’s My Water. Revenue by Segment
Millions of $
25000
Media Networks
20000
Parks & Resorts
15000 Studio Entertainment
10000 5000
Consumer Products
0 2010
2011
2012
2013
Interactive
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6 General Financial Overview
Ticker FOXA TWX VIA AMCX CCL DIS
Symbol
DIS
Total Assets
$83,723M
Price
$88.45
Shares Outstanding
1,716.5M
ROA ROE
8.68% 16.76%
EPS
4.16
P/E
21.24
Book Value
26.78
P/B
3.24
P/S
3.37
EV/EBITDA Avg. Daily Volume
12.00 5,671,070
Dividend Yield
1.00%
Industry Summary Disney is a competitor in numerous industries and no other company competes in all the areas that Disney does The most direct individual competitors across all segments include: 21st Century Fox, Time Warner Cable, Viacom, AMC Networks, and Carnival Cruise Lines. Total Share Market Cap P/E P/S Revenue ROA (millions) Assets Price $47,716 17.11 2.34 $31.87B $54.793B $34.07 6.49% $64,292 15.88 2.14 $30.57B $67.994B $74.72 7.06% $31,850 13.87 2.31 $13.44B $23.829B $75.30 11.37% $4,110 18.51 2.58 $1.88B $2.636B $56.95 11.60% $30,750 21.87 1.99 $15.82B $40.104B $39.58 2.87% $152,824 21.24 3.37 $47.99B $81.241B $88.45 8.68%
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7 5 Year Stock Price Change 250% 200% 150% 100% 50% 0% FOXA
DIS
TWX
VIA
AMCX
CCL
Media Networks: Disney is the largest competitor in the Media Networks industry. Over the next five years this segment is expected to expand due to increased advertising spending across the economy. Even though there is expected to be a transition from television to digital advertising over the next few years it is projected that over the next five years revenue is expected to grow at an annualized rate of 3.7%. Since Disney has an online presence already it is expected to take advantage of the shift to online advertising as well. Television Production Market Share 15.5% 29.6% 7.8%
DIS VIA NBC TWC
10.7%
FOXA 16.3%
20.1%
Other
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8 Studio Entertainment: The movie & video production industry is expected to only grow by .8% a year annualized over the next five years. This is partly due to the inundation of 3-‐‑D films into the market, which carry higher production costs than traditional films. Much of the revenue sourced from this industry is being transitioned into the distribution channels, which Disney also has a strong foothold in. Despite the poor industry outlook for this segment Disney has defied industry struggles by releasing blockbusters including The Avengers, as well as reaping strong sales from DVDs and Blue-‐‑ray films. In the movie & video production industry Disney is the second largest company, behind only FOXA. Movie and Video Production Market Share 14.10% 34.20%
9.50%
12.70%
DIS VIA TWC NBC FOXA
16.30%
13.20%
Other
Parks and Resorts: Consumer spending is expected to rise at an annualized rate of 2.6% for the next five years which will directly correlate to increased spending at Parks & Resorts. Additionally, domestic travel and international travel into the United States is expected to increase by 3.2% and 3.5% annualized for the next five years respectively. Disney is by far the largest competitor in
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9 this industry and as such stands to take advantage of the projected increases in revenue. Parks and Resorts Market Share 13.4%
DIS
6.4% 7.8%
Universal 48.1%
SeaWorld Cedar Fair
8.4% 15.9%
Six Flags Other
Consumer Products: The toy and craft wholesaling industry, Disney’s primary foray in Consumer Products, is expected to grow for the next five years at an annualized rate of 1.7% to a total $31.6B. Additionally, the retail market for toys is anticipated to see modest annualized growth over the course of the next five years. As disposable incomes continue to increase, this industry is expected to grow at 1.3% a year until 2019. Disney is not one of the main competitors in the Consumer Products industry, but it licenses out the rights to produce toys with its intellectual property frequently. Thus, Disney’s revenues are tied to the health of the industry.
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Per Capita Disposable Income
Percent Change
3 2 1 0 -‐1 -‐2 2007 2009 2011 2013 2015E 2017E 2019E
Interactive: Though Disney is not one of the largest players in the video game industry but they are expanding into it. The video game industry in the US is expected to grow at an annualized rate of 5.3% for the next five years. Additionally, Disney has a focus on the Social Network Game Development industry, and this industry is expected to at an annualized rate of 16.9%. However, revenue growth in this area is expected to slow in the future as social networks begin to charge more for social games, and for the use of virtual currencies. As Disney expands their Interactive division they should be able to capitalize on this growth. Last Quarter Financial Highlights Disney had a strong Q3 in 2014. Compared to 2013Q3 Disney saw higher revenues in all of their five divisions than the previous year (Revenue #s in Millions of Dollars)
Media Networks Parks and Resorts
2014Q3
2013Q3
5,511
5,352
3,980
3,678
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11 Studio Entertainment 1,807 1,590 Consumer Products 902 775 Interactive 266 183 Total 12,466 11,578 In total Disney had an increase in sales revenue by 7.6% compared to the same quarter last year. For the trailing nine months net income increased 20.16% over the last year’s trailing nine months, at the end of Q3. 2014Q3 compared to 2013Q3 saw an increase of 18.9% in net income. Trailing Nine-‐Month Revenue And Net Income Growth 40000 30000 Reveune
20000
Net Income 10000 0 2012
2013
2014
Growth Opportunities & Risks Growth Opportunities: Disney is currently pursuing a large number of different projects to leverage their influence and products to expand their business.
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•
Parks and Recreation: o Domestically Disney is updating one of their parks and is renovating Animal Kingdom by adding a new park, Avatar Land (based off of the critically acclaimed 2009 movie). Construction on Avatar Land began in January 2014 and is expected to open in 2017. In an effort to compete with Universal Studio’s “The Wizarding World of Harry Potter,” Disney’s new attraction should raise new interest in traveling to their parks. Additionally, Avatar (2009) is expected to be just the first installment in a tetralogy, and as such, the park should receive a large amount of advertising and interest, provided the sequels are as acclaimed as the original.
o Internationally, Disney is currently expanding its influence into Asian markets including China and India. Disney currently owns a 48% stake in the Hong Kong Disneyland Resort, which is considered to be one of the most popular theme parks in the world. Following this trend Disney owns 43% of a new theme park currently being built in Shanghai that is expected to open in 2015. § Disney is currently and will continue to spread its reach into the Asian markets which are continuing to become a greater portion of Disney’s revenue stream.
•
Interactive: o Disney has been working on expanding their influence in the gaming market, particularly the mobile gaming industry.
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13 o During FY2013 Disney released and updated titles including: Infinity, Epic Mickey 2, Club Penguin, Marvel Avengers Alliance, Gardens of Time and numerous mobile games. o With widely known characters and stories pertaining to all age groups Disney should be easily capable of leveraging all these assets into profitable gaming enterprises. § LucasFilm’s interactive gaming market has already cause a 7% increase in revenues for the Interactive segment.
• Studio Entertainment: o With the recent acquisition of LucasFilm Ltd. LLC in 2012 Disney acquired rights to the Star Wars franchise and plans on releasing additional sequels to the wildly popular franchise. § There are currently three movies planned for upcoming release, the first of which in 2015. o In 2010 Disney acquired Marvel and has seen success with leveraging their universe and characters to make movies and will continue to do so. o Disney will likely continue to acquire more companies to diversify their appeal to all demographics. Risks: Disney shares systematic risks as much as any company in its industry. Some of the risks however that Disney is especially susceptible include: o General slump in the economy and declining disposable incomes. o Theme parks and resorts compete with other forms of entertainment, lodging and tourism. o Loss of exclusive rights to various characters and copyright claims.
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14 o Continued production of in-‐‑demand content including broadcasting offerings, movie productions, video game productions, and innovations to resorts and parks. o Piracy of motion pictures, television programming and video content has increased the size of the unauthorized copies market. o The lack of market transparency and tolerance for illegal connections to cable systems have resulted in big losses in revenue, especially in many Asian countries. o Increased costs of financing for large-‐‑scale projects. o International culture and relations impacting Disney’s ability to spread and gain popularity on a global scale. Valuation Relative to its competition Disney appears to be fairly valued or slightly overvalued Taking the company’s main competitors a relative valuation was created using a variety of ratios. As summarized below the simple average valuation given by the multiples comes out to $86.17, just below the most recent closing price. Competitors P/E P/B EV/EBITDA P/S AVG CCL 21.87 1.19 11.05 1.89 FOXA 17.11 4.23 13.31 2.30 TWX 15.88 2.42 9.76 2.05 DISCA 22.71 4.09 12.93 4.19 AMCX 18.51 3.49 10.60 2.16 DIS 21.24 3.24 11.79 3.10 Average 19.09 3.495 11.678 2.76 Implied Price $79.41 $93.60 $92.93 $78.75 $86.17
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15 A Discounted Cash Flow analysis reveals that Disney is actually undervalued given the implicit assumptions Using a discounted cash flow model a fair price for Disney was determined to be $108.33. This implies the stock is currently trading at a 22.47% discount to its intrinsic value. The assumptions that go into this valuation are as follows. Revenue was projected by segment using past years growth rates as well as accounting for significant events in the upcoming years believed to have a larger than average impact on the segments revenue. These events are mostly addressed in the growth opportunities section. An appropriate discount rate for the free cash flows was found to be 7.858% by using a weighted average of the cost of equity and the cost of debt. Cost of equity was determined to be 9.89% by using a beta of 1.07 and a market risk premium of 7%. Cost of debt was extracted from the companies 10-‐‑K as 3.22%. The perpetuity growth method was used to predict a terminal value. The perpetuity growth rate was assumed to be 2.5% since the company is a relatively consistent growth generator, and it is believed they will continue to be into the future. Below is a sensitivity table corresponding to differing discount rates and perpetuity growth rates: Analysis
8.86% 7.86% 6.86%
WACC
1.5% $79.17 $92.97 $103.32
Perpetuity Growth Rate 2.0% 2.5% $79.17 $90.00 $100.00 $108.33 $111.93 $97.41
3.0% $96.81 $118.38 $135.08
3.5% $104.88 $130.74 $151.16
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16 Recommendation Based on the significant size and dominance of Disney in its industry, as well as the many projects that they currently working on, and immense potential for future growth, Disney looks to have strong growth prospects and it commands a high valuation. Based on the multiples valuation and the discount cash flow valuations Disney appears to be trading at or below its intrinsic value. Thus, Disney is considered a hold, since the comparable valuation showed Disney to be trading a bit more expensive than its competitors. Disney is still a strong company and has a lot of growth in its future, and is definitely a stock to hold onto.
