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Report developConsumer, Retail, & Hea

Summary of Key

Information

The Walt Disney Company

NYSE: DIS

Multi-Industry media conglome

with established presences inentertainment 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

Mutual Investment

Club of Cornell

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


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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 1stto September

31st. Notable officers and directors include:

Officer Name Title

Robert Iger President/CEO

James Rasulo CFO

Kevin Mayer

Executive VP Corporate

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%.

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

3 Year Stock Return

S&P 500 Disney


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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 toa 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 asfees 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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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 Disneys intellectual

property.

o Revenue is derived from licensing use on

intellectual properties to manufacturers,

as well as wholesaling childrens 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 AvengersAlliance, Gardens of Timeand Wheres My

Water.

0

5000

10000

15000

20000

25000

2010 2011 2012 2013

Millio

nsof$

Revenue by Segment

Media Networks

Parks & Resorts

StudioEntertainment

Consumer Products

Interactive


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General Financial Overview

Symbol DIS

Total Assets $83,723M

Price $88.45

Shares Outstanding 1,716.5M

ROA 8.68%

ROE 16.76%

EPS 4.16

P/E 21.24

Book Value 26.78

P/B 3.24P/S 3.37

EV/EBITDA 12.00

Avg. Daily Volume 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 Disneydoes

The most direct individual competitors across all

segments include: 21stCentury Fox, Time Warner

Cable, Viacom, AMC Networks, and Carnival Cruise

Lines.

TickerMarket Cap

(millions)P/E P/S Revenue

Total

Assets

Share

Price

ROA

FOXA $47,716 17.11 2.34 $31.87B $54.793B $34.07 6.49%

TWX $64,292 15.88 2.14 $30.57B $67.994B $74.72 7.06%

VIA $31,850 13.87 2.31 $13.44B $23.829B $75.30 11.37%

AMCX $4,110 18.51 2.58 $1.88B $2.636B $56.95 11.60%

CCL $30,750 21.87 1.99 $15.82B $40.104B $39.58 2.87%

DIS $152,824 21.24 3.37 $47.99B $81.241B $88.45 8.68%


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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.

0%

50%

100%

150%

200%

250%

FOXA DIS TWX VIA AMCX CCL

5 Year Stock Price Change

29.6%

20.1%16.3%

10.7%

7.8%

15.5%

Television Production Market Share

DIS

VIA

NBC

TWC

FOXA

Other


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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 TheAvengers, 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.

Parks and Resorts:

Consumer spending is expected to rise at an annualized

rate of 2.6% for the next five years which will directlycorrelate 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

14.10%

9.50%

12.70%

13.20%16.30%

34.20%

Movie and Video Production Market

Share

DIS

VIA

TWC

NBC

FOXA

Other


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this industry and as such stands to take advantage of

the projected increases in revenue.

Consumer Products:

The toy and craft wholesaling industry, Disneys

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, Disneys

revenues are tied to the health of the industry.

48.1%

15.9%

8.4%

7.8%

6.4%

13.4%

Parks and Resorts Market Share

DIS

Universal

SeaWorld

Cedar Fair

Six Flags

Other


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Interactive:

Though Disney is not one of the largest players in thevideo 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)2014Q3 2013Q3

Media Networks 5,511 5,352

Parks and

Resorts 3,980 3,678

-2

-1

0

1

2

3

2007 2009 2011 2013 2015E 2017E 2019E

PercentCh

ange

Per Capita Disposable Income


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Studio

Entertainment 1,807 1,590

Consumer

Products 902 775

Interactive 266 183Total 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 years trailing nine months, at the

end of Q3. 2014Q3 compared to 2013Q3 saw an increase

of 18.9% in net income.

Growth Opportunities & Risks

Growth Opportunities: Disney is currently pursuing alarge number of different projects to leverage their

influence and products to expand their business.

Trailing Nine-Month Revenue

And Net Income Growth

0

10000

20000

30000

40000

2012 2013 2014

Reveune

Net Income


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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 Studios The

Wizarding World of Harry Potter,

Disneysnew 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 theHong 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 ofDisneys 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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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.

LucasFilms 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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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

Disneys ability to spread and gain popularity ona global scale.

Valuation

Relative to its competition Disney appears to be fairly

valued or slightly overvalued

Taking the companys main competitors a relative

valuation was created using a variety of ratios. Assummarized 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 4.19AMCX 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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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 wasassumed 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

Perpetuity Growth Rate

1.5% 2.0% 2.5% 3.0% 3.5%

8.86% $79.17 $79.17 $90.00 $96.81 $104.88

WACC 7.86% $92.97 $100.00 $108.33 $118.38 $130.74

6.86% $103.32 $111.93 $97.41 $135.08 $151.16


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