Page | 1 Financial Analysis The Walt Disney Company is the world’s second’s largest media conglomerate, with assets encompassing movies, music, publishing, television and theme parks. Introduction 5 The company has the ability to be a successful conglomerate due to its Board of Directors, content theme of quality, as well as customer ordination in all its operating segments. Each of these divisions that Disney owns and operates leaders in their respective industries and capitalize multiple channels that have been created to ancillary products for profit based on each segment. 5 Disney is most notable known for theme parks. Having destinations around the world, Paris, China, Japan, and the United States, these theme parks play a critical role in Disney’s profitability. Currently, Disney is planning on laying-off, though the current number is undisclosed. 12 They employ around 80,000 people in their parks; in the month of January they bought out 600 executives. 12 Also, profits for the December 2007 were down 24% in the parks. 6 Currently, the economic recession has limited families to expend much of their income on vacations. Oil and energy prices have also fluctuated, which contributes to the dwindling number of visitors. 6 The Disney theme parks continue to draw millions of visitors but do to the recent economic downturn the company announced to cut hundreds of jobs in 2009, to counter-balance the slowing tourism industry. 5 Walt Disney Company, though in no way is slowing their growth of the parks, investing over $1 billion through 2012 to upgrade California Adventure Park, with a goal to incorporate more Pixar within the park. 1 Disney’s Media business is also connected, but not affected as greatly by current conditions, due to the diversification of Disney and box-office and TV successes. 4 However they do have one troubled sector, ABC. 5 Pirates of the Caribbean grossing $2.79 billion worldwide, and the acquisition of Pixar and their first movie under the Disney label WALL-E grossed $521 million worldwide, as well as the TV sector hit shows such as Grey’s Anatomy and Desperate Housewives. 5 Robert A. Iger is President and Chief Executive Officer of The Walt Disney Company. He guided the complex merger of ABC with The Walt Disney Company. ABC saw tremendous growth during Iger's career there, becoming a market leader in broadcast television and expanding into numerous cable and related ventures. Walt Disney’s brand name alone is one of the most recognized and prized in the world at 9 th according to Interbrand. 2 Disney adds value to each of diverse holding due to four segments. First, The Walt Disney logo and name, estimated to be alone worth $29.2 million. Second, Mickey Mouse is the sixth most recognizable figure in current culture, ahead of the Olympic Rings. 3 6 Third, Disney has extensive R&D. Fourth, the company is very good at marketing, especially when Disney produces a new movie. 4 1 (The Walt Disney Company 2008) 2 (Interbrand 2008) 3 (Doyle 2007)
Transcript
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Financial Analysis
The Walt Disney Company is the world’s second’s largest media conglomerate, with assets encompassing movies, music, publishing, television and theme parks.
Introduction
5 The company has the ability to be a successful conglomerate due to its Board of Directors, content theme of quality, as well as customer ordination in all its operating segments. Each of these divisions that Disney owns and operates leaders in their respective industries and capitalize multiple channels that have been created to ancillary products for profit based on each segment.5 Disney is most notable known for theme parks. Having destinations around the world, Paris, China, Japan, and the United States, these theme parks play a critical role in Disney’s profitability. Currently, Disney is planning on laying-off, though the current number is undisclosed.12 They employ around 80,000 people in their parks; in the month of January they bought out 600 executives.12 Also, profits for the December 2007 were down 24% in the parks.6 Currently, the economic recession has limited families to expend much of their income on vacations. Oil and energy prices have also fluctuated, which contributes to the dwindling number of visitors.6
The Disney theme parks continue to draw millions of visitors but do to the recent economic downturn the company announced to cut hundreds of jobs in 2009, to counter-balance the slowing tourism industry.5 Walt Disney Company, though in no way is slowing their growth of the parks, investing over $1 billion through 2012 to upgrade California Adventure Park, with a goal to incorporate more Pixar within the park.1
Disney’s Media business is also connected, but not affected as greatly by current conditions, due to the diversification of Disney and box-office and TV successes.
4 However they do have one troubled sector, ABC.5 Pirates of the Caribbean grossing $2.79 billion worldwide, and the acquisition of Pixar and their first movie under the Disney label WALL-E grossed $521 million worldwide, as well as the TV sector hit shows such as Grey’s Anatomy and Desperate Housewives.5 Robert A. Iger is President and Chief Executive Officer of The Walt Disney Company. He guided the complex merger of ABC with The Walt Disney Company. ABC saw tremendous growth during Iger's career there, becoming a market leader in broadcast television and expanding into numerous cable and related ventures. Walt Disney’s brand name alone is one of the most recognized and prized in the world at 9th according to Interbrand.2 Disney adds value to each of diverse holding due to four segments. First, The Walt Disney logo and name, estimated to be alone worth $29.2 million. Second, Mickey Mouse is the sixth most recognizable figure in current culture, ahead of the Olympic Rings.3 6 Third, Disney has extensive R&D. Fourth, the company is very good at marketing, especially when Disney produces a new movie.4 1 (The Walt Disney Company 2008) 2 (Interbrand 2008) 3 (Doyle 2007)
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Price Ratio Analysis
Currently, Disney has a .94% book value ratio; this indicates a strong value for their stock.
Book Value Ratio
5 Time Warner is at .68%, and the market median .89%.5 Walt Disney Company has total assets of $62,497 which is lower than their total liabilities, at $30,174.5 Time Warner is currently below both Disney and the market median at .68%. This could indicate that the market is under appreciating Time Warner, or there could be a fundamental problem with the company.4 Their total assets are at 113,896 and total liabilities are 71,308.5
5
Time Warner’s total liabilities account for around 62% of the company, where as Disney’s total liabilities account for around 48% of the company.
Disney has a cash flow ratio of 6.11%, stronger than Time Warner at 2.87%, and the market median at 5.73%. This indicates a health financial future for Walt Disney.
Cash Flow Ratio
5 They currently have had recent success, particularly the movie series Pirates of the Caribbean, grossing $2.79 billion worldwide.6
6 The acquisition of Pixar, and their first movie under the
Disney/Pixar label, WALL-E grossed $521 million worldwide. They have had some problems with ABC, though the Disney Channel and ESPN have balance out the problems with ABC.6 Currently Disney has around $3 million in cash and is able to invest due to a positive net income of $4,427 million.5 Time Warner is currently below both Disney and the market median at 2.78%. This could due to Time Warner’s publishing unit not been faring well.5 Downturn in print advertising and readership has made the company restructures its operations in America in order to align new entertainment and lifestyle publications.5 AOL is the company’s largest challenge.5 Although, Google is helping them transform AOL from an online access servicer to an ad-supported content portal.5 In 2008, Time Warner had a negative net income of (13,402) million.5
Disney has an earning to growth ratio of 3.69%, which is greater than Time Warner at (.56%).
Earning to Growth Ratio
5 Their EPS is $2.10, greater then Time Warner at ($3.74).5 The positive number is directly correlated to Disney’s positive profit in 2008 of net income of $4,427 million.4 Disney’s potential value, when compared to Time Warner, is superb which also correlates with its book value ratio which is .94%.5 This being higher than the industry average, we would expect Disney to have a high PEG ratio.4 Time Warner is currently at negative (.56%), this is directly related to their negative Net Income of (13, 402).5 Their EPS is ($3.74). 5 This indicates either the company is having internal problems, or the stock is undervalued.
4 (Investopedia 2009) 5 (Hoovers 2009) 6 (The Walt Disney Company 2008)
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Disney EPS5
Time Warner EPS 5
At this time, Disney’s sale ratio is .83%, stronger than Time Warner at .61%, but just below the market median of .89%.
Sales Ratio
5 The industry median is .54%, indicating that Disney is relatively strong in their industry.4 Disney compared to Time Warner, indicates that Disney has the stronger share price at around $18 compared to Time Warner’s $9.5 This could be due to the positive net income that Disney had in 2008.7
Disney has a dividend yield ratio of 1.1%, which is lower than Time Warner’s 2.5%.Dividend Yield Ratio
5 This seems good for stock holder of Time Warner, but due to their negative net income, Time Warner could decide not to pay out dividends. This ratio could change next quarter for Time Warner.4 Investing in Time Warner for the short time may make sense, but Disney seems to have a long-term investor in mind, re-investing the cash gains into the company to further their stock price.7 Since Time Warner had a negative net income, they cannot reinvest cash.7 Alternatively, they may choose to pay out dividends but not re-invest in the company, which could result in a lower stock price.4
The earnings ratio for Disney is 7.8%, below the market media of 10.11%.Earnings Ratio
5 Time Warner did not supply there earnings ratio for 2008.5 Overall, Disney’s P/E ratio is modest and investors can expect moderate earning growth.7 The difficult economic times, results in expected spending to be lower.4 Also, most of the Walt Disney Company is very centered on families; whereas,
other competitors in this market have an adult or singles audience, which have more expendable income in the current economic situation.4 It is recommended to hold Disney stock and a moderate buy for Time Warner.7
7 (Nasdaq 2009)
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Current Quarter
Mar 09
Current Year
Sep 09
Next Year
Sep 10
Average Estimate $1.78
$1.98
Number of Analysts 24
20
High Estimate $2.32
$2.55
Low Estimate $1.55
$1.63
Year Ago EPS $2.27
$1.78
Growth Rate (21.51)%
11.30%
Time Warner5
Current Quarter
Mar 09
Current Year
Feb 09
Next Year
Feb 10
Average Estimate $0.90 $0.98
Number of Analysts 18 13
High Estimate $1.05 $1.16
Low Estimate $0.65 $0.75
Year Ago EPS $0.99 $0.90
Growth Rate (8.70)% 8.85%
Per Share Data
At this time, Disney has revenue per share of $19.93, compared to Time Warner’s $13.10, and the market median of $5.47.
Revenue Per Share
5 When we compare the EPS with revenue per share, we see that EPS is below market median of 10.11% at 7.80%.5 However, the revenue per share is substantially higher than the market median.5 Usually, changes in these two numbers indicate long-term price for the company’s stock and appreciation in the share price.4 When looking at Walt Disney’s EPS, it is currently at $1.78 and is predicted to grow to $1.98, a $.20 increase.5 Time Warner’s EPS is only predicted to increase by$.08 for 2010.5
The dividends per share for Disney are currently $.35, which is higher than Time Warner’s $.25 though below market median.
Dividends Per Share
5 For the past few years, Disney has increased their dividends per share from $.21 in 2003 to $.35 in 2008.5 This steady growth indicates management at Walt Disney Company believes that continual growth can be sustained.4 Time Warner in 2001 did not pay dividends, but started in 2005 at $.10 and since increased to $.25 in 2008.5 Though the jump from 2005 to 2006 has been the most substantial of $.11, Disney has been relatively steady between increasing $.03- $.04 yearly.5
Disney’s cash flow per share is at $2.72, much higher than the market median of $.68, though lower the Time Warner’s $2.88.
Cash Flow Per Share
5 Both of these numbers are strong and indicate that both companies have a good supply of cash readily available. Their firms are sustainable based on their business models.7
Disney has a working capital per share of $.47. Time Warner currently has a working capital per share of $.73. Disney is just above the market median of $.43.
Working Capital Per Share
5 Walt Disney Company’s current assets are $11,666 and their current liabilities are $11,591.5 This indicates that Disney is able to pay off their current liabilities and their working capital is not so high that they are not collecting their money (account receivable) in the business cycle.4
Time Warner’s current assets are at $16,602 and their current liabilities are at 13,976, leaving them ample amount to pay.5 Though Time Warner’s number is greater than Disney’s,
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11 Theme Parks
this could indicate Time Warner has a problem with collecting their money (accounts receivable) within the business cycle.7 Long-Term Debt Per Share Currently, Disney has a long-term debt per share of $6.59, much higher than the market median of $2.90, but lower then Time Warner’s $10.48.
5 Though Disney’s long-term debt per share is higher than the median market, when compared to the revenue per share, this long-term debt seems very likely to be paid off.4 With a ratio of almost 3:1 compared to the market median of a ratio of 2:1, Walt Disney is very likely to pay of the long-term debt all things staying equal.7 Time Warner currently has a long-term debt per share of $10.48 much closer to their revenue per share of $13.10, a ratio less than 1:1.5 Time Warner is less likely to pay off their long-term debt when compared to Disney.7
Disney is currently at $17.59 for their book value per share, higher the Time Warner at $11.79, and the market median of $5.01.
Book Value Per Share & Total Assets Per Share
5 Since we are currently in a bear market, both Disney and Time Warner are closer to their book values.5 When compared to the current stock price of $17.13, Disney’s stock is currently undervalued indicating a good time to invest in Walt Disney.7 Time Warner is also undervalued at a current stock price of $8.22 which would also indicate a good time to purchase Time Warner stock.7 Disney’s total assets per share are $34.96, higher than Time Warner of $31.74, and the market median of $10.45.5
Walt Disney Company’s main revenue stream for the next year will continue to be from its Media Networks and the Theme Parks.
Main Revenue Stream, Savings, and Losses
8
8 As indicated by Disney’s 2007 Revenue stream,
these three segments will grow due to the current economic situation. Families are already spending less money in the theme parks; attendance was down from local visitors by 1% for 2008 and 10% for the first quarter so far.9 Though due to the weak dollar, international attendance is up, revenue was up 11%, and operating income by 33%; as international attendance grew 25% compared to one year ago, according to Disney’s first quarter results.10
8 (Wikiinvest 2009)
9 (Forbes 2008) 10 (The Walt Disney Company 2008)
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8
Much of Disney’s Media Networks’ revenue comes from advertising, and many companies will cut back, it should not be as drastic for Disney due to their affiliate fees.8 These fees are a stable source of revenue and Disney has the highest affiliate fees in the industry due to ESPN, and hit shows such as Gray’s Anatomy.8 “A large portion of affiliate fees come from sports coverage channels in the ESPN network, where the cost of sports coverage is rising. Extended increases in sports coverage cost may materially affect operating income after 2013, when Disney's current contracts with broadcasters will expire.”8
Studio Entrainment is not as strong a contender for profits this year. With the acquisition of Pixar in 2006, Up will certainly be a large money maker since Ratatouille generated $625 million worldwide.11
8
Disney has also started to distribute it content through video-on-demand online and through the iTunes. This will help generate revenue from the younger audience since this demographic is more inclined to not use traditional media types.
Finally, Disney will continue to generate royalties from its contracts since they were made prior to the credit crunch and most of their customers are not canceling or adjusting these orders.8 Walt Disney Company’s saving will be from cutting jobs and hours worked within the theme parks.12
12 Since February 2008, Disney works have not been working with a contract and
many of the employees have been cut to 30 hours of work a week. Disney is also attempting to cut its greenhouse-gas emissions by half in the next four year and electricity consumption by 10%.13
13 Though this may have a high short-term cost, the mid to long-term cost should save
Disney substantial amount of money. Overall, Walt Disney Company has limited ways in
11 (MPAA 2009) 12 (Garcia, Disney plans layoffs, streamlining as economy eats into revenue 2009) 13 (Garcia, Disney making plans to go green 2009)
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saving money, since the industry is very competitive and requires hit TV shows and movies which cost money to produce.8
The main losses for Disney will most likely come from its Studio Entertainment, since per capita admissions have gone down.11 This is not to say that this loss will be substantial compared to other segments of loss. The main reason for loss in Studio Entertainment could be due to the economic situation and people not wanting to spend money at a movie theater. If Walt Disney produces poor films, such as Pixar’s Up not performing well. The DVD market is also slowing and film piracy is increasing.11 Though Disney has been able to counter this by limiting release of certain DVDs, this still will affect them.
Disney recently invested $350 million in into the video games market segment.8 This segment of the market is very volatile and though Disney will focus on kids games, the competition is very stiff with much of this market dominated by EA.14
14
The production time and cost to produce a video game range from one year to five years or longer, and bare a cost of between $8 million to $15 million to produce. Disney wants to focus on kids games, although during this economy parents are less likely to spend $50 to $60 on a video game.14 The video game markets main demographic is males 18 to 35.14
Finally, The Writers Guild of America, in 2007, were on strike and many TV shows where canceled or put on hold during negotiations.8 Since this is main revenue stream for Disney, Media Networks strikes for a pro-longed time could be very detrimental.8
14 (Johannes 2006)
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Conclusion
Walt Disney Company is financially sound, when compared to Time Warner. The company outperforms Time Warner and the Market Median in almost all sections. They are currently able to pay back all short-term liabilities, and are financially leveraged to pay back their long-term debt.19 Based on revenue from 2006 to 2008 the company has grown. There was a decrease in 2008 to 11.7% from the preceding year of 13.2%, though it still out performed the 2006 year.19 The 2008 decrease is connected to the economic slowdown that happened in quarter 4 of 2008.6 During quarter 4 Disney experience a sharp decrease, particularly in their theme parks revenue, this is the main reason for the 2008 digress.6 To counter this Disney has restructured their theme park division, and consolidated their studio and media divisions.6 The new president and CEO, Robert Iger also brings a new vision for Disney, which differs far from Eisner, and closer to the Board of Directors vision.15
15 This new vision should
help Disney re-establish its self, focusing on its roots and core strengths. “Creativity continues to be the essence of Disney, even as our businesses expand across borders and media platforms, it is the foundation for almost everything we do, the source of our strength and our success, and the fuel that will power us into the future. Fostering and encouraging that creativity – from movies to television, from animation to live-action, from theme parks to consumer products to our online business – is our top priority… We must continue to cultivate a culture of creativity, to move boldly and take intelligent risks necessary for innovation, growth and success in the future. A future that, as always, will be propelled by the power of Disney’s creative spirit.”15
When examining the company from a stock-holder perspective, the company has struggled. However, when compared to other companies in the media conglomerate industry the stock has outperformed, based on a growth of $10,000.16
According to Morningstar the company is considered a Large Value.16 This means the company shows a large-cap bias, and is less volatile than growth stocks.16 If it were showing growth stock signs it could indicate financial problems, which is not palpable currently.16 Finally the current stock price is $19.88.17
19 Based on the Greenspan Model, this stock is
undervalued. The Greenspan Model predicts the stock price could have a high of $66.21, mid of 59.10, and a low of $52.36.1817 The Greenspan Model coupled with a strong ROA for the past 12 months, and an earning yield of 9.62% indicates the company is healthy.16
Financial Overview
Price Ratios (%) Walt Disney Company
Time Warner Market Median
Book Value Ratio .94 .68 .89 Cash Flow Ratio 6.11 2.78 5.73 Earnings to Growth Ratio 3.69 (.56) --- Sales Ratio .83 .61 .89 Dividend Yield Ratio 1.1 2.5 --- Earnings Ratio 7.80 --- 10.11 19
Per Share Data ($) Walt Disney Company
Time Warner Market Median
Revenue Per Share 19.93 13.10 5.47 Dividends Per Share .35 .25 .68 Cash Flow Per Share 2.72 2.88 .31 Working Capital Per Share .47 .73 .43 Long-Term Debt Per Share 6.59 10.48 2.90 Book Value Per Share 17.73 11.79 5.01 Total Assets Per Share 34.96 31.74 10.45 19
Year 2008 37,843 4,427 11.7% Year 2007 35,510 4,687 13.2% Year 2006 34,285 3,374 9.8%
19 Income Statement: Time Warner ($)
Revenue Net Income ($ mil.) Net Profit Margin ($ mil.)
Year 2008 46,984 (13,402) --- Year 2007 46,482 4,387 9.4% Year 2006 44,224 6,552 14.8%
19
Works Cited DISNEY, ROY E. "SHAREHOLDERS MEETING REMARKS." Walt Disney, March 3, 2004.
Doyle, Nelson. The World’s Most Recognizable Symbols and Trademarks. October 18, 2007. http://bizcovering.com/marketing-and-advertising/the-world’s-most-recognizable-symbols-and-trademarks/ (accessed 3 15, 2009).
Garcia, Jason. Disney making plans to go green. March 14, 2009. http://www.orlandosentinel.com/business/sfl-tc-biz-disney-0316-sbmar14,0,5407452.story (accessed March 15, 2009).
—. Disney plans layoffs, streamlining as economy eats into revenue. 2 3, 2009. http://www.orlandosentinel.com/topic/orl-disney1909feb19,0,7089251.story (accessed 2 24, 2009).
Hoovers . Time Warner Inc. 2009. http://0-premium.hoovers.com.library.uor.edu/subscribe/co/factsheet.xhtml?ID=fffrfthrxksshtkjyf (accessed 2 07, 2009).
Hoovers. The Walt Disney Company. 2009. http://0-premium.hoovers.com.library.uor.edu/subscribe/co/factsheet.xhtml?ID=rrjfysytjjfykj (accessed 02 07, 2009).
Interbrand. 2008 Best Global Brand Result. 2008. http://interbrand.com/ (accessed 3 10, 2009).
Nasdaq. About the Revenue and EPS Summary Page. 2009. http://quotes.nasdaq.com/asp/MasterDataEntry.asp?page=redpage (accessed 3 13, 2009).
The Walt Disney Company. Disney Announces Significant Expansion Plan For The Disneyland Resort. 10 15, 2008. http://corporate.disney.go.com/news/parks_resorts/news_release/Disneylandresort/2008/101508_expansion_plan.html (accessed 3 20, 2009).
