St.

John’s University Undergraduate

Student Managed Investment Fund
Presents:
Walt Disney Company (DIS)

Analysts:
Joseph Ali
Marco Diaz
Raymi Lopez
Noelle Taddeo

Recommendation: Purchase 100 shares

Share Data: (12/05/14)

Price: $93.76
LTM P/E: 22.01
Beta: 1.091, 10-Year, Adjusted
Shares Outstanding: 1,696 Million
Market Capitalization: $155.38 B
52-week high:$ 93.98
52-week low: $68.80

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 Table of Contents

I. Executive Summary…………………………………………………………………….3
II. Company Overview……………………………………………………………………..4
A. History…………………………………………………………………………….4
B. Business Segments………………………………………………………….....5
C. Executive Leaders……………………………………………………………....7
III. Industry Overview……………………………………………………………………….8
IV. Fundamental Analysis………………………………………………………………...11
A. Ratio Analysis……………………………………………………………….....14
B. Earnings Forecast……………………………………………………………..21
C. Relative Valuation……………………………………………………………..25
D. Absolute Valuation…………………………………………………………….28
E. Risk Factors…………………………………………………………………....31
V. Recommendation……………………………………………………………………...32
VI. References……………………………………………………………………………..33

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 I. Executive Summary

After evaluating Disney, our group believes that it is has many prospects and its stock
price is positioned to grow in the next few years. We recommend buying 100 shares of
Disney stock. After performing the relative and absolute valuation, we have concluded
that Disney is worth more than its current stock price of $91.63. Considering its
acquisitions of various media companies over the years such as Pixar, and more
recently Marvel and the Star Wars franchise from Lucasfilm, Disney is lined up for
blockbuster films for years to come, just as it has performed strongly in this category in
the past. One of its recent films, Frozen, has just reached 5th highest grossing film
status at $1.2 billion.

Due to the potential for many more commercially successful films and its financial
strength compared to its peers, we think that Disney is aligned with the goals of the
Investment Fund. Disney is beyond a household name, captivating generations of
Americans since the early 1900s. It would be a strong addition to the portfolio and
contribute to long term growth.

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 II. Company Overview

A. History
“The Walt Disney Company, together with its subsidiaries and affiliates, is a leading
diversified international family entertainment and media enterprise with five business segments:
media networks, parks and resorts, studio entertainment, consumer products and interactive
media” (thewaltdisneycompany.com).
The Walt Disney Company was founded on October 16, 1923 by Walt Disney and Roy
O. Disney as the Disney Brothers Cartoon Studio. The Company established itself as a leader in
the American animation industry with iconic characters such as Mickey and Minnie Mouse with
their first appearance in Steamboat Willie in 1928. The Walt Disney Company has grown to
encompass more than just its own brand by diversifying into live-action film production,
television, and theme parks, music, publishing, and online media, and owning and operating the
ABC broadcast television network.

Walt Disney Company Timeline:

1955: Disneyland opened the first Disney Park in Anaheim, CA to an invited audience.
In the fall of 1971, Walt Disney World Resort opened the Magic Kingdom and two hotels near
Orlando, Florida.
In 1975, Walt Disney World Village, a large outdoor mall with Disney-built specialty shops opens
to later become Disney Village Marketplace.
1983: Tokyo Disneyland opens in Japan as the first international Disney Theme Park
1983: Disney Channel begins broadcasting with 18 hours of programming per day
1987: First Disney store opens in Glendale, CA
1989: Hollywood Studios and Pleasure Island open at Walt Disney World Resort
1992: Euro Disneyland opens, the first in europe, later renamed Disneyland Paris
1994: Beauty and the Beast Broadway show opens in NYC.
1994: The Lion King opens
1994: Disney Interactive, intended for creating and selling cartridge games and CD-ROM
software is formed
1995: purchases 25% percent of California Angels baseball team.
1995: Disney Online created to develop online presence
1995: Disney Channel beings operation in the UK
2001: Fox Family Channel acquired, renames ABC Family
2004: acquires the Muppets and Bear in the Big Blue House
2005: Hong Kong Disneyland opens
2005: First to license TV episodes, from ABC and Disney Channel series on iTunes
2006: Pixar Animation Studios acquired
2009: Disney XD, a new cable network, launches
2009: Marvel Entertainment joins Disney family
2011: Disney Dream makes first voyage

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2011: Officially started construction on Disney Shanghai
2011: Aulani, a Disney Resort & Spa in hawaii opens
2012: Disney Junior television network launches
2012: Disney Fantasy makes its maiden voyage
2012: Acquired Lucasfilm, the company that makes Star Wars.

B. Business Segments

Media
Media Networks comprise a vast array of broadcast, cable, radio, publishing and digital
businesses across two divisions – the Disney/ABC Television Group and ESPN Inc. In addition
to content development and distribution functions, the segment includes supporting
headquarters, communications, digital media, distribution, marketing, research and sales
groups.

The Walt Disney Studio

The Walt Disney Studios has been the foundation on which The Walt Disney Company was
built. Today, the Studio brings quality movies, music and stage plays to consumers throughout
the world. Feature films are released under the following banners: Disney, including Walt Disney
Animation Studios and Pixar Animation Studios; Disneynature; Marvel Studios; Lucasfilm; and
Touchstone Pictures, the banner under which live-action films from DreamWorks Studios are
distributed. The Disney Music Group encompasses the Walt Disney Records and Hollywood
Records labels, as well as Disney Music Publishing. The Disney Theatrical Group produces and
licenses live events, including Disney on Broadway, Disney On Ice and Disney Live!.

Parks, Resorts and Cruises

“At the heart of Walt Disney Parks & Resorts (WDP&R) are five world-class vacation
destinations with 11 theme parks and 44 resorts in North America, Europe and Asia, with a sixth
destination currently under construction in Shanghai. WDP&R also includes the Disney Cruise
Line with its four ships - the Disney Magic, Disney Wonder, Disney Dream and Disney Fantasy;
Disney Vacation Club, with 12 properties and approaching a total of 200,000 member families;
and Adventures by Disney, which provides guided family vacation experiences to destinations
around the globe” (thewaltdisneycompany.com).

Disney Consumer Products

“Disney Consumer Products (DCP) is the business segment of The Walt Disney Company
(NYSE:DIS) and its affiliates that delivers innovative and engaging product experiences across
thousands of categories from toys and apparel to books and fine art. As the world's largest
licensor, DCP inspires the imagination of people around the world by bringing the magic of
Disney into consumers' homes with products they can enjoy year-round. DCP is comprised of
three business units: Licensing, Publishing and Disney Store. The Licensing business is aligned
around five strategic brand priorities: Disney Media, Classics & Entertainment, Disney & Pixar

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Animation Studios, Disney Princess & Disney Fairies, Lucasfilm and Marvel. Disney Publishing
Worldwide (DPW) is the world's largest publisher of children's books, magazines, and digital
products and also includes an English language learning business, consisting of over 40 Disney
English learning centers across China and a supplemental learning book program. DPW's
growing library of digital products includes best-selling eBook titles and original apps that
leverage Disney content in innovative ways. The Disney Store retail chain operates across
North America, Europe and Japan with more than 350 stores worldwide and is known for
providing consumers with high-quality, unique products” (thewaltdisneycompany.com).

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C. Executive Leaders

“Robert A. Iger
Chairman and CEO
Prior to his current role, Mr. Iger served as President and Chief Executive Officer
beginning in October 2005 and President and Chief Operating Officer from 2000-2005.
He received a Bachelor of Science degree in Television and Radio from Ithaca College.
Iger is credited for the successful acquisition of Pixar (2006), Marvel (2009), and
Lucasfilm (2012), as well as innovating Disney’s creative content offerings across new
and multiple platforms.

Andy Bird
Chairman, Walt Disney International
Prior to his position as Chairman, Bird worked with Time Warner as president of
TBS International in 2000. Bird’s responsibilities include developing and implementing
strategies to increase Disney brand affinity and awareness in key international markets,
introducing new customers and guests to Disney’s legacy and iconic characters, and
investing in and maximizing opportunities in emerging markets. He has, successfully
acquired UTV, launched Dlife, and reorganized Disney’s international structure.

Alan Braverman
Senior Executive Vice President, General Counsel and Secretary
Since 2003, Braverman has served as the chief legal officer of the company and
oversees its team of attorneys responsible for all aspects of Disney’s legal affairs.
Previously, Braverman was executive vice president and general counsel, ABC, Inc.
and deputy general counsel, The Walt Disney Company. He received his B.A. degree
from Brandeis University in 1969 and his J.D. degree from Duquesne University in
1975.

Ronald L. Iden
Senior Vice President, Global Security
Iden joined Disney after working with the Federal Bureau of Investigation and the
California Office of Homeland Security. In his current role, he is responsible for
developing and coordinating Disney’s security efforts worldwide. He received his B.A.
degree from the University of Illinois and a Master’s degree from the Illinois Institute of
Technology.

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Kevin Mayer
Executive Vice President, Corporate Strategy and Business Development
Prior to his current role, Mayer was a partner and head of the Global Media and
Entertainment practice for L.E.K. Consulting LLC. Presently, he is responsible for
targeting emerging businesses, Managing cross-divisional issues and opportunities, and
executing all mergers, acquisitions, and divestiture transactions. Mayer received his
M.B.A. from Harvard University in 1990, and holds a M.S.E.E. from San Diego State
University and a B.S.M.E. from Massachusetts Institute of Technology”
(thewaltdisneycompany.com).

III. Industry Overview

Disney is difficult to categorize because it is involved in many different industries

but it is best described as a diversified international family entertainment and media
conglomerate. This includes 21st Century Fox, Viacom and the other companies that
produce and develop movies and TV shows and other types of media and are the ones
we chose to compare Disney to for our relative valuation and margin comparative
analysis. However Disney also has quite a presence in the theme park and resorts
industry, with a Disneyland in France, China and their own cruise line.

To compare all aspects of Disney, we chose other media enterprises such as

21st Century Fox, Viacom, CBS, Time Warner Inc and Six Flags Entertainment.
Although Disney is best described as a media conglomerate, to account for its other
divisions we compared them across three different industries in total:

Media Conglomerates, with an industry total revenue of $141,142.44 million in 2014

Hotels/Resorts/Cruise lines, with an industry total revenue of $76,349.21 million;
Movies & Entertainment, with an industry total revenue of $38,196.22 million.

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Below is the 2009-13 historical performance and forward looking outlook for Media
Conglomerates, with quite optimistic prospects for 2015 and 2016.

And below is the same historical performance and outlook for Movies/ Entertainment
and Hotels/Resorts, respectively. Both of these show results and prospects which are
akin to the Media Conglomerates outlook:

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Lastly, the chart below is a breakdown of each segment of Disney as a part of total
revenue. As the chart shows, the bulk of their revenue comes from their media
networks, followed by their parks and resorts:

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 IV. Fundamental Analysis

To get an idea of where Disney is compared to it’s peers, we chose Time Warner Inc,
21st Century Fox, CBS Corp, Viacom and Six Flags Entertainment as a benchmark for
comparison. Because its media represent the bulk of its sales, we chose various media
companies with Six Flags to compare the parks and resorts side of things.

A. Ratio Analysis

1) Growth Rates

Sales Growth

Avg
Annual
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Growth

DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC

Total 2004-
Revenue 2014 2009-2014

DIS 30869 32132 35156 36237 36990 36289 39040 40956 42840 45993 49326 4.80% 3.12%

FOX 21898 24498 26738 30554 32719 30926 33082 34152 34333 25338 31913 3.84% 0.31%

TWX 42089 42401 43690 46482 26516 25785 26888 28974 28729 29795 27428 -4.19% 0.62%

CBS 22526 14113 14320 14073 13950 13015 14060 14245 14089 15284 13854 -4.74% 0.63%

VIA 8132 9610 11467 13423 14625 13619 13165 15038 13249 13677 14057 5.63% 0.32%

SIX 998.59 956.76 945.67 972.78 1,021.30 912.86 975.89 1,013.17 1,070.33 1,109.93 1157.1 1.48% 2.40%

Industry
Total 126512.59 123710.76 132316.67 141741.78 125821.3 120546.86 127210.89 134378.17 134310.33 131196.93 137735.1 0.85% 1.34%

In the last 10 years, Viacom comes in first in sales growth, with Disney in second,
followed by 21st Century Fox and Six Flags. Time Warner and CBS have actually had
negative growth. Since the recession however, Disney comes in first, followed by Six
flags and the rest having somewhat anemic growth. This can be attributed to Disney’s
aggressive acquisitions in the last few years, including Marvel entertainment and Pixar.

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 EBIT

Avg
Annual
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Growth
2004-
EBIT ($$$) DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC 2014 2009-2014
DIS 4057 4094 6033 7098 6497 6034 7130 7975 9011 10151 11890 12.15% 8.52%
FOX 3278 3772 3935 4922 4687 3561 4620 5401 5698 4819 5998 8.13% 1.81%
TWX 6714 6967 7830 8729 4536 4972 5533 5955 6245 6989 6272 2.35% 7.15%
CBS 5084 2626 2707 2622 2159 1244 1896 2575 3013 3262 3030 -21.23% 19.82%
VIA 2283 2366 2772 3013 2977 2997 3247 3830 3682 4092 4179 6.58% 4.29%
161.6 204.5 288.4
SIX 152.79 174.87 91.72 76.38 4 67.82 134.9 153.96 6 9 261.5 -5.46% -8.50%
Industry 19999. 23,368. 26460 21017 18,875 22,560 25,889 27853 29601 31630.
Total 21568.79 87 72 .38 .64 .82 .90 .96 .56 .49 5 11.53% 6.60%

EBIT is all profits before deducting interest payments and income taxes. This is a good
way to level the playing field when comparing companies that might have different tax
structures. In this case we see that Disney is performing strong compared to its peers,
leading in 10 year average growth and losing only to CBS in the last 5 years, but only
because CBS took a huge hit between 2008-9 and has recovered somewhat. In
absolute terms, Disney has the highest EBIT at $11890 million, more than double since
2004.

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 Cash Flow Operations

Avg
Annual
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Growth
Cash 2004- 2009-
Flow Ops DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC 2014 2014
DIS 4528 4692 5995 5544 5046 5717 6782 7609 7376 9520 10776 9.06% 6.54%
FOX 2849 2852 3501 4144 2791 3207 3943 4414 4165 2579 3662 2.54% 1.34%
TWX 6618 4877 8598 8475 3902 3385 3314 3448 3442 3714 3396 -6.45% 0.03%
CBS 3641 3537 1888 2185 2147 939 1735 1749 1815 1873 1276 -9.95% 3.11%
VIA 1990 1636 2270 1776 2036 1551 1860 2558 2440 2807 3113 4.58% 7.22%
371.6 368.6
SIX 33.2 121.41 9.8 -37.5 66.93 77.76 64.89 274.94 3 8 399.2 28.23% 17.77%
Industry 17715.4 22,26 22086. 15988 14,876 17,698 20,052 19609 20861 22622.
Total 19659.2 1 1.80 5 .93 .76 .89 .94 .63 .68 2 1.41% 4.28%

Cash flow from operations refers to the amount of cash a company generates from the
revenues it brings in, excluding long term investment on capital items or financial
investments. Here we see similar performance to above, with Disney more than
doubling its cash flows and barely falling between 2007-2009. Today all of its
competitors are barely generating as much cash flow as they did before the recession.
Viacom is ahead of Disney in average growth of the last five years, followed by CBS.
Six Flags has had the highest growth as an average in absolute terms its total cash
flows are dwarfed by the other companies.

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2) Margin and Ratio Analysis. Note: For all ratios to come, ‘2014” is LTM
September 2014.

EBIT Margin

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
EBIT
Margin DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC
DIS 13.143 12.741 17.161 19.588 17.564 16.628 18.263 19.472 21.034 22.071 41.293
FOX 14.969 15.397 14.717 16.109 14.325 11.515 13.965 15.815 16.596 19.019 17.285
TWX 15.952 16.431 17.922 18.779 17.107 19.283 20.578 20.553 21.738 23.457 23.779
CBS 22.571 18.608 18.905 18.62 15.479 9.56 13.485 18.077 21.385 21.343 21.822
VIA 28.071 24.625 24.173 22.448 20.356 22.006 24.664 25.469 27.791 29.919 29.928
SIX 15.301 18.277 9.699 7.851 15.827 7.43 13.823 15.195 19.112 25.992 22.647
Industry
Avg 18.335 17.68 17.10 17.233 16.776 14.40 17.46 19.10 21.276 23.634 26.126

EBIT margin is the amount of a sales dollar left over after paying fixed and variable
operating costs. An increasing margin can give a pretty good idea of how good a
company is at lowering costs. As the margin increases, more revenue is available for
expansion or other activities. Disney is leading the pack once again in terms in
improvement over the last ten years, from 13% to over 40%. Its closest competitor
today is Viacom at 29.9%, but this is only a 1% improvement over ten years. The other
companies have also marginally improved their margin, and CBS has actually seen a
decline.

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 Net Profit Margin

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Net
Profit
Margin DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC
DIS 7.71 8.029 12.348 11.654 10.873 9.11 11.324 12.133 13.072 14.337 15.367
FOX 8.377 9.76 11.979 10.882 -6.354 10.829 9.464 9.871 11.645 15.613 12.422
TWX 7.624 6.009 11.611 8.715 -14.493 7.877 9.54 9.909 10.446 11.874 14.585
CBS -66.854 -59.24 9.657 8.746 -83.678 1.74 5.151 9.063 11.598 12.255 10.095
VIA 15.746 13.569 13.695 12.145 8.431 11.682 11.196 14.078 16.809 18.14 17.355
SIX -17.401 -11.359 -21.887 -25.091 -9.524 -26.4 60.43 -2.355 32.395 10.632 10.722
Industry
Avg -7.466 -5.539 6.234 4.508 -15.791 2.473 17.851 8.783 15.994 13.808 13.424

Net Profit Margin is the company’s bottom line; how much are they taking away after all
expenses and deductions. This a measure of how much of each sales dollar is left after all
expenses. Currently Viacom is in first place, but down from last year and only up 2% since
2004, after taking a large decline in 2008. But not as bad as Time Warner, CBS and Six Flags,
who lost profitability that year. Fortunately, Disney also declined but recovered fast and has
been making steady gains since. Also note that Disney has the most sales in dollars, making
these gains even more impressive.

ROE

ROE 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
DIS 9.45 9.983 15.005 13.43 12.761 9.606 11.952 13.241 14.309 15.453 16.598
FOX 7.232 9.24 10.59 9.978 -7.595 15.086 12.085 12.288 14.38 17.275 24.253
TWX 5.494 4.048 8.085 6.813 -7.623 5.368 7.735 9.129 10.031 11.837 15.018
-
CBS -28.622 -26.225 6.111 5.471 77.642 2.571 7.688 13.088 16.242 18.564 16.480
VIA 9.957 14.739 21.002 22.836 17.435 20.22 16.219 24.214 29.343 41.464 53.680
- -
SIX -12.631 -10.438 25.268 70.378 -- -- 421.939 -2.933 41.884 18.648 32.635
Industry -
Avg -1.52 0.225 5.921 -1.975 12.533 10.57 79.603 11.504 21.031 20.54 26.444

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For every dollar invested in Disney by the shareholders, they generated 16 cents in the
LTM Sept 2014 period. This is the return on equity invested, or ROE. Although
Disney’s ROE has improved over the last 10 years, it is on the lower end of the scale as
of today and lags behind the industry average. In this regard Viacom, Fox and Six
Flags lead, Viacom having an especially good year returning over 50%.

ROA

ROA 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
DIS 4.45 4.729 7.572 6.824 6.3 4.926 6.304 6.862 7.248 8.051 9.069
FOX 3.478 4.414 5.589 5.192 -3.49 6.297 5.549 5.78 6.518 6.819 7.539
TWX 2.573 1.989 3.826 2.943 -2.994 2.171 3.71 4.123 4.265 5.031 6.395
CBS -19.081 -15.06 3.196 2.933 -34.681 0.841 2.727 4.933 6.206 7.088 5.743
VIA 6.353 7.025 7.676 7.2 5.282 6.953 6.553 9.34 9.942 11.107 10.19
SIX -3.954 -2.866 -5.797 -7.96 -3.255 -8.116 20.909 -0.887 12.156 4.167 4.473
Industry
Avg -1.03 0.039 3.677 2.855 -5.473 2.179 7.625 5.025 7.722 7.044 7.235

Return on Assets is the measure of how good a company is at using its assets to
generate earnings. Arguably Disney’s greatest assets are intangibles such as the
brands it owns and such, and in this category we see them make steady improvements
as they buy up and acquire brands such as Pixar and Marvel, although they are not far
ahead of the industry average. Its closest competition in this regard is Viacom, the
brand giant owning everything from MTV to BET. The other companies are a point or
two below and have negative returns in 2008, with only Disney and Viacom holding up
that year.

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Asset Turnover

Asset
Turnover 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
DIS 0.577 0.589 0.613 0.586 0.579 0.541 0.557 0.566 0.554 0.562 0.59
FOX 0.415 0.452 0.467 0.477 0.549 0.582 0.586 0.586 0.56 0.437 0.607
TWX 0.337 0.331 0.329 0.338 0.207 0.276 0.389 0.416 0.408 0.424 0.438
CBS 0.285 0.254 0.331 0.335 0.414 0.483 0.53 0.544 0.535 0.578 0.569
VIA 0.403 0.518 0.561 0.593 0.626 0.595 0.585 0.836 0.879 1.344 0.587
SIX 0.227 0.252 0.264 0.317 0.342 0.307 0.346 0.377 0.375 0.392 0.417
Industry
Avg 0.374 0.399 0.428 0.441 0.453 0.464 0.499 0.554 0.552 0.623 0.535

This ratio is a measure of asset use efficiency. The higher the ratio, the more revenue
the company is generating per dollar of assets. As of 2014, Fox is the most efficient,
although most of the companies have been making strides in this regard. Disney has
fluctuated between .541-.590, but is still quite competitive today, and has always stayed
above the industry average.

Inventory Turnover

This is an efficiency ratio that shows how quickly a company moves its inventory (sells
its products) over a given time period, in this case annually. A low inventory turnover
suggests poor sales or too much inventory. Fortunately, Disney does not seem to suffer
from either, with a ratio consistently leading the industry.

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Financial Leverage

Financial
Leverage 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
DIS 2.11 2.12 1.88 2.07 1.99 1.92 1.88 1.98 1.97 1.88 1.87
FOX 2.29 1.94 1.86 1.98 2.51 2.3 2.07 2.18 2.23 3.02 3.36
TWX 2.1 2.01 2.25 2.37 2.86 2.07 2.1 2.34 2.37 2.34 2.5
CBS 1.62 1.98 1.85 1.88 3.13 2.99 2.66 2.64 2.59 2.65 3.12
VIA 1.82 2.45 3.04 3.3 3.3 2.59 2.37 2.86 3.06 4.74 6.22
SIX 3.71 4.05 5.52 89.24 -21.43 -4.98 3.16 3.47 3.43 6.99 7.88
Industry
Avg 2.28 2.43 2.73 16.81 -1.27 1.15 2.37 2.58 2.61 3.60 4.16

Financial leverage is the degree to which a company uses borrowing of all kinds for
financing. A high degree of financial leverage can mean high interest payments that
ultimately hurt the company's bottom line and earnings. It can also increase the
volatility of a company’s stock price. Disney has improved this ratio over time and is
quite ahead of the rest, Six Flags and Viacom being very high.

Long Term Debt to Equity

This is a financial ratio showing the relative proportion of shareholder’s equity and debt
used to finance a company’s assets. A high ratio means a company has been using
debt to finance its growth, which can result in volatile earnings due to high interest
expenses. Fortunately, Disney’s LTM September ratio is far lower than all of its
competitors, with similar historical results.

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TIE

TIE (times interest earned) is the ratio of EBIT of a firm to its interest expense during a
given period. It measures a company’s ability to cover its interest payments from debt,
with a higher value meaning a greater ability to do so. Disney excels in this category as
well, managing a TIE ratio of double the industry average since 2006, and making large
strides since.

Current Ratio

This is a liquidity ratio that measures a company’s ability to pay short term obligations
with its short term assets; the amount of current assets per $1 of current liabilities. A
ratio under 1 suggests the company would not be able to pay its obligations if they
came due. Fortunately, Disney’s is adequate as of LTM September 2014 but is still low
compared to its peers. However we do not view this as an issue as Disney has very
easy access to financing due to their Debt to Equity ratio.

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Quick Ratio

This is another liquidity ratio that gauges how well the firm can pay short term
obligations with its most liquid assets (cash, short-term investments, and accounts
receivable). Disney’s quick ratio is quite low, but again is a minor issue because of its
access to financing.

Du Pont Analysis

Du Pont analysis is useful for dissecting ROE and determining how a firm can maximize
its value. Here we see an increasing ROE over the last 3 fiscal years (ended
September), where financial leverage stayed about the same, and asset turnover up
just a slight increase. This illustrates that the increasing ROE can be attributed to high
profit margins.

Dupont Analysis 2012 2013 2014

Net Profit Margin 13.440 13.623 15.367
Asset Turnover 0.575 0.577 0.590
Financial Leverage 1.906 1.833 1.830

ROE 14.731 14.406 16.598

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B. Earnings Forecast

Income Statement

1. Total Revenue (2015)

The total revenue for Disney in 2014 is $48,813.00M. The total revenue
forecasted for Disney for 2015 is $52,498.91M. This number was conceived by
estimating segmented market shares for 2015. We used corresponding industry growth
estimates as benchmarks to calculate previous market shares:

146187.19 Industry Total Revenue (Media Conglomerates)Forecast

81494.73 Industry Total Revenue (Hotels/Resorts/Cruiselines)
42307.87 Industry Total Revenue (Movies Entertainment)
0.155 Disney as a % of Industry Total Revenue (Media Market Share)
0.267 Disney as a % of Industry Total Revenue (Hotels/Resorts/Cruiselines Market Share)
0.191 Disney as % of Industry Total Revenue (Studio Entertainment Market Share)
$52,498.91 Disney Forecasted Total Revenues

Then we identified trends to determine a market share for 2015. To be

conservative we used the same market shares as the previous year for 2015, except for
the media segment which we added 50bps since on average for the past 5 years the
media market share for Disney has been growing by roughly 50bps. The market share
for Disney was 14.6% for media in 2013, in 2014 it was 15%, and in 2015 we estimated
its share of revenue to go to 15.5%. The market share for Disney was 26.8% for parks,
resorts, and hotels for 2013, in 2014 it was 26.7%, we left it the same for 2015 at
26.7%. The market share for Disney was 16.4% for studio entertainment in 2013, in
2014 it was 19.1%, for 2015 we estimated that conservatively it would remain the same
at 19.1%.

2. Cost of Goods Sold

We noticed a trend in (COGS excluding Depreciation and Amortization) as a

percent of sales. It was consistently decreasing. It was 82% of revenue in 2004 and in
2014, it was 71% of revenue. We believe that this shows the company is becoming
more efficient at managing its cost of goods as time goes on. Ultimately, we used an
average of the last two years to be conservative which resulted in 72755. We took that

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percentage and multiplied by the forecasted 2015 revenue which gave us $38,195.81M
as our estimate for COGS excluding D+A.

3. Depreciation

We looked at depreciation as a percentage of gross prior year PP&E. In the last

few years, it had held constant at ~4.6% (4.5433%, 4.6376%, and 4.6031% for the
years 2012, 2013, and 2014, respectively). We expect no reason that this will change in
the future, therefore, we kept the 4.6%. To get the depreciation estimate, we took 4.6%
and multiplied by prior year (Sep. 2014) gross PP&E of $47,054M, thus producing
$2,164.48M in estimated depreciation for FY2015.

4. Interest Expense

The interest expense forecasted is the gross interest expense for 2015 minus the
interest capitalized which turns out to be 346.26M.

5. Gross Interest Expense

We took all the bonds that mature after September 2014 and calculated the
interest payments that Disney would have to make. The interest payments total is
$422.27M.

6. Interest Capitalized

In the most recent years (2012-2014), interest capitalized has fluctuated between
16.3% and 19.9%, the latter representing the most recent of the portions. Because of
this, we decided to take an average to be conservative. The average was 18.0%. We
multiplied the 18% by the gross interest expense of $422.27M to get $76.01M.

7. Unusual Expense
We found this value to be mostly immaterial, however, we placed $100M
expense as a placeholder for possible restructuring and reorganization charges since
these were significant in fiscal 2013 and 2014.

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 8. Earnings Per Share

Disney had a buyback program in effect in 2014 with which they stated the
intention to repurchase $6-8B of shares. In 2014, they repurchased $6.525B, so we
estimate they will buy back $1.5B in shares in 2015. We took the $1.5B during 2015 and
equally divided it in each quarter, giving $375M/quarter or ~4 million shares/ quarter. If
the quarterly weighted average declines by about the same amount as repurchases,
then by September it will have fallen from 1734 (Sept 2014) to 1734-16=1718 by
September 2015. Applying the 1.014 relationship between annual weighted average
and quarterly weighted average at September 2014, that brings us to 1718*1.014 =
1742 for September 2015. So taking earnings and dividing by the new weighted
average diluted shares, it came out to be $4.39.

The complete income statement forecast is below:

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24
C. Relative Valuation

Forward P/Es

Foward P/E
Company 2015

DIS 20.16

FOX 21.18

TWX 18.47

CBS 15.68

VIA 12.81

SIX 32.78

S&P Consumer
Discretionary 16.72

Industry Avg 19.69

This table compares the forward P/Es of Disney to it’s major competitors. Disney’s P/E
ratio is quite high compared to the others, Fox being close and Six Flags appearing to
be grossly overvalued. More importantly, Disney is above the average as well and we
believe that to be due to an expectation of future growth prospects and stock price
appreciation.

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Historical Relative Proportion 2004-
2014

Comparable P/E Average Median

DIS/FOX 1.043 0.844

DIS/TWX 1.029 1.067

DIS/CBS 0.774 0.823

DIS/VIA 1.182 1.109

DIS/SIX 2.879 1.059

ETF 0.877 0.982

Industry Avg 0.901 0.910

This table above shows the average relative proportion between Disney and its
competitors in P/E ratios over the last ten years. We used the median as well as the
average to account for an outlier. This chart shows that Disney has traded at a
premium compared to most of its competitors, except for Fox and CBS, as well as the
industry average.

Relative Price Using

RELATIVE PRICE Median

FOX $94.961 $76.91

TWX $81.711 $84.78

CBS $52.166 $55.50

VIA $65.085 $61.11

SIX $405.757 $149.28

S&P Consumer
Discretionary $63.067 $70.60

Industry Avg $76.242 $77.07

Avg of Price Estimates 119.855 82.178

These are the price estimates calculated by multiplying the relative P/E’s by Disney’s
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E(EPS) for 2015. We used the median as well to account for the outlier we
encountered with Six Flags. In our relative valuation of Disney, we calculated a price
relative to each comparable by taking the average relationship between P/E values,
multiplying that times the corresponding forward P/Es, then multiplying that times our
estimated EPS. Once we calculated the relative price for each comparable, we then
took an average, giving us a price of $82.18 with a significant outlier, and a price of
$75.48 without the outlier. This relative valuation model concludes an overvalued price
as of 12/05/2014 ($93.76).

Relative Valuation Recommendation: Do not Buy

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D. Absolute Valuation
We calculated a discount rate, k, to calculate the PV of the dividend cashflows.
We used the Capital Asset Pricing Model to come up with a few different k’s by using
different treasury rates from the 10-year T-bond and the 5-year T-bond. We used the
lowest beta, which was a 10 year adjusted of 1.091, and the highest which was a 5-year
raw beta of 1.193, then used two market risk premiums of 7.168% and an 8.4% risk
premium.

CAPM
Risk free rate: 2.24 and 2.92
Beta: 1.091 and 1.193
Risk Premium: 7.168% and 8.4%

The 7.168 premium is calculated from Bloomberg and the 8.4% is the historical
average of the premium from 1986-2013. We calculated K’s ranging from 10.66% to
12.94%. Then, we took the average of all of those K’s and came out with ~11.5 %
average, which is what we used as a discount rate. We double checked the yield to
maturity on bonds outstanding by Disney over 10 years, and the 18 year bond had a
yield of 3.74, which was much lower than our K.

We then collected EPS and DPS numbers for the last 11 years (2004-2014) and
then calculated the CAGR of Disney’s dividends per share from 2004-2014, 2007-2014,
and from 2009 to 2014. There had been a significant change in the latest CAGR, but
since we are unaware of any circumstances that would significantly affect any future
growth rates, we cannot justify changing it.

average annual growth 04-14 average annual growth 07-14 average annual growth 09-14
16.963% 18.523% 26.860%

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Scenario 1 2015 2016 2017 2018 2019 2020

PV of Cashflows using k=10 $1.22 $1.30 $1.38 $1.47 $1.56 $1.66 = $8.60

PV of Cashflows using k=11 $1.21 $1.28 $1.35 $1.42 $1.49 $1.57 = $8.32
PV of Cashflows using
k=11.5 $1.21 $1.27 $1.33 $1.39 $1.46 $1.53 = $8.18

We did not use the historical payout since if we did, our forecasted dividend for
2015 would be the same as last year 2014 (which is highly unlikely given Disney’s
dividend history). Instead, we decided to override it with the CAGR of dividend growth
from 04-14, which was 16.963%. Once we did this, we were able to get a dividend
stream for the years up to 2020, shown in the table above. This is for scenario 1, which
assumes Disney would keep its momentum. The table below is scenario 2 which
accounts for a slowdown due to a possible downturn in the business cycle.

Scenario 2

PV of Cashflows using k=10 $1.05 $1.11 $1.18 $1.26 $1.34 $1.42 = $7.36

PV of Cashflows using k=11 $1.04 $1.09 $1.15 $1.21 $1.28 $1.35 = $7.12

PV of Cashflows using
k=11.5 $1.03 $1.08 $1.14 $1.19 $1.25 $1.31 = $7.00

At this point, we had to come up with a measure of “terminal value.” The two
tables below show our calculations for 9 estimates of cash flows by growing the 2020
dividend separately by 1% to 9% in 1% intervals. We did a separate valuation assuming
each of those growth rates. We did it in conjunction with 3 different discount rates,
whereas 11.5 was the highest, thus necessitating the highest growth and giving us the
most conservative price estimate with a specified growth. We were able to determine
that since the growth rate (the one that corresponds to the k=11.5%) which makes the
stock fairly-valued now is 9.5386% and is lower than the lowest actual average growth
rate we calculated (04-14, 16.96%), and MUCH lower than Disney's most recent actual
growth rate we calculated ('09-'14, 26.86%), this suggests that growth for this company
will probably be higher than 9.5386% for the post 2020 period, thus making Disney an
attractive investment.

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 E(DPS) Valuation IV2015 IV stage 1 IV of
Growth 2021 K=11.5% growth 2 growth both

1.00% 297.38% 28.32 $14.74 $8.18 $22.92

2.00% 300.32% 31.61 $16.45 $8.18 $24.64

3.00% 303.27% 35.68 $18.57 $8.18 $26.75

4.00% 306.21% 40.83 $21.25 $8.18 $29.43

5.00% 309.16% 47.56 $24.75 $8.18 $32.94

6.00% 312.10% 56.75 $29.53 $8.18 $37.72

7.00% 315.05% 70.01 $36.43 $8.18 $44.62

8.00% 317.99% 90.85 $47.28 $8.18 $55.47

9.49% 322.38% 160.35 $83.45 $8.18 $91.63

Growth E(DPS) 2021 Valuation K=11.5% IV2015 growth 2 IV stage 1 growth IV of both

1.00% 2.54 24.23622987 $12.61 $7.00 $19.62

2.00% 2.57 27.05263386 $14.08 $7.00 $21.08

3.00% 2.60 30.53172114 $15.89 $7.00 $22.89

4.00% 2.62 34.93856504 $18.18 $7.00 $25.19

5.00% 2.65 40.7013609 $21.18 $7.00 $28.19

6.00% 2.67 48.55971889 $25.27 $7.00 $32.28

7.00% 2.70 59.91068043 $31.18 $7.00 $38.18

8.22% 2.73 83.09255046 $43.24 $7.00 $50.25

9.84% 2.77 166.7089313 $86.76 $7.00 $93.76

Absolute Valuation Recommendation: BUY

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E. Risk Factors

1. Liquidity Risk
This involves the ability to maintain liquidity, which includes the ability to pay off
expenses and debts. In this regard, Disney is not in the best shape as it has a
substantial amount of bonds issued, some due as far as 2030, but its current ratio is at
a 1.14 as of this fiscal year, which is sufficient to pay its obligations if the time came and
is not far behind its competitors.

2. Credit Risk
This is the risk of loss or nonpayment from a debtor or anyone that owes them
money. Disney has moderate to low credit risk, stating on their 10-k that they generally
do not enter into transactions with any parties with a credit rating of less than A- and
they limit the amount of credit exposure with any one institution.

3. Market Risk
This is the exposure the company has to changes in the market value of its
financial assets. The first is trading risk, which Disney has a moderate amount of as its
largest portion of investments is dedicated to stocks, with a 31-60% range. It has then
allocated a 20-40% portion to fixed income investments such as bonds, and a 10%
portion dedicated to real estate, commodities, and venture capital. Some of their
agreements also allow options and futures, but the bulk of their investments is
diversified in corporate and government bonds and equities.
Non trading risk comes from the completion of Disney’s services to its customers
and its daily and long term execution of business practices. Disney does not have
above average risk in this regard, although this can change if assets and liabilities are
re priced.

4. Operational Risk

Operational risk is the danger of loss resulting from external occurrences such as
improper systems and processes, human error, and foreign culture and regulation. This
can occur in several ways, such as errors, business interruptions, fraudulent acts like
hacking, and employee behavior. Disney generally does not have a lot of exposure to
this as the bulk of their revenues comes from movie productions, but they are exposing
themselves to more of this kind of risk as they continue to build more Disneyland

31
locations around the world and expand their cruise lines. But overall they have a solid
record of service in their locations, with Disneyworld in Florida and Disneyland in
California being icons for generations of Americans and visited constantly to this day.

Recommendation
As a result of our analysis, our recommendation is to buy 100 shares of Disney.
Based on the valuation models and ratio analysis it seems that Disney is well-positioned
to grow significantly through their license acquisitions and expanding parks and resorts.
We believe Disney will be beneficial to the portfolio.

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 References

Disney SEC Form 10-K and all charts retrieved from Factset

Business Executives retrieved from http://thewaltdisneycompany.com/about-

disney/leadership

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