THE WALT DISNEY COMPANY

Company background

The Walt Disney Company, commonly known as Disney is an American diversified

multinational mass media and entertainment conglomerate headquartered at the Walt Disney
Studios complex in Burbank, California.

Disney was originally founded on October 16, 1923, by brothers Walt and Roy O. Disney as

the Disney Brothers Cartoon Studio; it also operated under the names The Walt Disney
Studio and Walt Disney Productions before officially changing its name to The Walt Disney
Company in 1986. The company established itself as a leader in the American
animation industry before diversifying into live-action film production, television, and theme
parks. Since the 1980s, Disney has created and acquired corporate divisions in order to market
more mature content than is typically associated with its flagship family-oriented brands. The
company is known for its film studio division, The Walt Disney Studios, which includes Walt
Disney Pictures, Walt Disney Animation Studios, Pixar, Marvel Studios, Lucasfilm, 20th
Century Studios, Searchlight Pictures, and Blue Sky Studios. 

The company, which trades on the New York Stock Exchange (NYSE) under DIS stock
symbol, has been a component of the Dow Jones Industrial Average since 1991. In August 2020,
just under two-thirds of the stock was owned by large financial institutions.

FINANCIAL OVERVIEW

As for the financial overview, the company is stable for the past 4 years. As for the latest year,
company has earned a positive income and its Net Profit Margin in 2019 was 15.89%. As for the
market value, its trend has been normal too. There’s been a pattern of increase in the stock price
every year. The graph show the true picture of the price from the last 5 year, 2015 to 2020.
To fully understand the Company’s financial positon, we have calculated relevant financial
ratios. They are given below:

 Company Liquidity 

Common liquidity ratios include the quick ratio, current ratio, and days sales

outstanding. Liquidity ratios determine a company's ability to cover short-term obligations and
cash flows, while solvency ratios are concerned with a longer-term ability to pay ongoing debts.

As we can see that company position is pretty good. The comparison of the last four years shows
that company is maintaining its assets and liabilities properly. From the analysis of Liquidity
Ratios, we can say that the company has strong liquidity.

Liquidity Ratios 2016 2017 2018 2019

Current Ratio 1.007 0.811 0.942 0.892
Quick Ratio 0.925 0.741 0.864 0.840
Debt Ratio 0.486 0.530 0.464 0.516
Cash Ratio 0.274 0.205 0.232 0.172

 Solvency Analysis 

A solvency ratio measures the extent to which assets cover commitments for future payments,
the liabilities. The solvency ratio of an insurance company is the size of its capital relative to all
risks it has taken. By looking at the solvency ratios we can say how the company is making
payments and paying off its long-term obligations to creditors, bondholders, and banks.
The equity ratio indicating a normal proportion of equity used to finance a company's assets. The
same with Debt/equity ratio and long-term/equity ratio, only in 2016 where Lon-term debt was
high, as the company decided to invest in some new project and took loans for this purpose. But
unlike equity funding, company has to pay the debt back. If debt financing is larger, it would be
difficult to pay it back.

Another ratio related to debt is interest coverage ratio which is on decreasing pattern but it’s still
more than 2 which is good indication. The overall solvency analysis shows company’s strong
position.

Solvency Ratios 2016 2017 2018 2019

Equity Ratio 0.514 0.470 0.536 0.484
Debt/Equity Ratio 0.945 1.128 0.866 1.066
LTD/Equity 1.449 0.620 0.590 0.297
Interest Coverage Ratio  18.09 14.88 12.61 6.20

 Efficiency Analysis

Efficiency Analysis is typically used to analyze how well a company uses its assets and liabilities
internally. An efficiency ratio can calculate the turnover of receivables, the repayment of
liabilities, the quantity and usage of equity, and the general use of inventory and machinery.
Assets turnover is below 1, but it’s almost the same with the industry average. Company can
focus more on the assets to improve the turnover. As for the other ratios, they indicate good
efficiency of the company. Receivable period is increasing but it’s still less than 90 days. As for
the inventory, company is handling it well. Overall company’s efficiency is good.

Efficiency Ratios 2016 2017 2018 2019

Asset Turnover  0.62 0.59 0.61 0.48

Account Receivable Period 59 56 57 80

Inventory Turnover  37.58 39.91 42.99 45.75

Inventory Turnover in days 9.71 9.15 8.49 7.98

  Profitability Analysis 

Profitability analysis is an analysis of the profitability of an organization's output. It show the

overall company’s performance. Profit margin indicates the degree to which a company or a
business activity makes money, essentially by dividing income by revenues. The return on assets
shows the percentage of how profitable a company's assets are in generating revenue. ROE
measures how efficiently a company is generating income from the equity investments and last
but not the least earnings per share indicates how much money a company makes for each share
of its stock. In all cases, the table shows profitability ratios are good which indicates good
position of the company, overall the ratios decreased in 2019 but still its more than the industry
average.

We can say the same for Profitability Analysis that it’s strong.

Profitability Ratios 2016 2017 2018 2019

Profit Margin 16.88% 16.29% 21.20% 15.89%

ROA 10.20% 9.37% 12.78% 5.70%

ROE 19.84% 19.95% 23.85% 11.77%

EPS $5.76 $5.73 $8.40 $6.68

Risk and risk factors 

Every company faces risk, no matter international or local. Walt Disney Company is one of the
biggest companies right now. Disney Company's management acknowledges that a company as
large as Disney could have several potential risk factors.

One of Disney's main concerns is how changing global and regional economic markets could
affect the profits of some of their businesses. These changes could result in a devalued U.S.
dollar and increases in labor costs in foreign markets as well as markets at home. In addition, the
company’s success is highly dependent upon technology, which changes rapidly. The success of
the company depends largely on how well the company expands, exploits, acquires, develops,
and adopts these new technologies to distinguish the company's products from their
competitors. Other unforeseen events, natural disasters, and seasonal changes can result in
excessive costs. Besides the unexpected events of nature, seasonal changes affect the popularity
of many of Disney’s events and attractions, especially the theme parks. Apart from that In
addition, many new investments are costly and do not yield a high rate of return, which we may
not be able to expect ahead of time. Unpredicted turmoil in financial markets can cause a rise in
the cost of borrowing, which would lead to a higher cost of operating our businesses, especially
when we have to borrow money. These are some kinds of risk Walt Disney faces.

INESTMENT POLICY

The Company aims to achieve its investment objectives through long only investment in quoted

closed-ended funds and other collective investment vehicles, bonds, commodities and cash, as
considered appropriate.

In case of Walt Disney, they invest a major amount of money in different projects. But their
main investment is in the parks and resorts. The average investment value from 2014 to 2019 is
29,225. They have 3 kinds of investments every year Parks, Resorts and other property, Projects
in Progress and Land. The graph shows how much money, they invest in each category and we
can see the almost 83% to 88% of the total investment is in Parks, Resorts and other property.
Then from 8% to 13% for Projects in Progress and in the end, 4% to 5% in land.

By looking at the amount of investment Disney had done, we can say that company is investing
more in log-term health of the company.

5% 4% 4% 4%
100% 10% 8% 13% 13%
90%
80%
70%
60%
50% 86% 88% 83% 83%
40%
30%
20%
10%
0%
2016 2017 2018 2019

Parks, Resorts and other property Projects in Progress Land

DIVIDEND POLICY

The Walt Disney Company (DIS) is one of the largest diversified international companies
specializing in entertainment, media, parks, resorts, and various consumer products. Disney owns
some of the most recognized TV channels in the U.S., including Disney, ABC, and ESPN.
Disney has consistently paid dividends over 40 years, and it has a track record of increasing its
dividend. Disney raised its dividend per share from $0.84 semiannually to $0.84 in 2018. While
Disney does not disclose how it determines its dividends, the payouts are likely contingent on the
company's performance and especially its ability to generate sufficient operating cash flows to
cover its investment and financing requirements.

As you can see in the table, the details about DPS and EPS are given. Apart from that, we can
see the average price of the stock is also increasing every year, plus if we’ll look at the P/E (ratio
of a company's share price to the company's earnings per share) it’s also increasing. Company’s
yield is also positive. In the end, Total Shareholder's Return is high and it’s almost 25% which
means, company shareholder are getting good returns.

Dividend Policy 2016 2017 2018 2019

Dividends 2,313 2,445 2,515 2,895
DPS $1.42 $1.56 $1.68 $1.69
EPS $5.76 $5.73 $8.40 $6.68
Average Price 94 100.04 112.98 131
P/E 18.01 14.83 14.82 23.10
Yield 1.41% 1.46% 1.56% 1.30%
Total Shareholder's Return   24.6706 24.5696 22.4201

VALUATION METHODS

Many methods can be used to value a company. In reality, business valuation is often a
combination of these different approaches. One of the most widely used quantitative methods is
the market multiples method. The market valuation is utilized generally as a primary market
input, to provide an objective starting point for the valuation. Put simply, this method multiplies
the sales or profits of a business by an industry averaged multiplier to calculate the Market Value
of the business. The company Walt Disney also uses a Market Multiple-based approach, and a
Discounted Cash Flow (DCF) valuation.

MARKET MULTIPLE BASED APPROACH

The most common multiple used in the valuation of stocks is the P/Earnings NTM multiple
(Price to Earnings). P/E relates the current share price with the market expectations in terms of
Earnings per Share. This multiple is used to compare a company's market value with its earnings.
A company with a high P/Earnings NTM is considered to be overvalued; a company with a low
P/Earnings NTM is considered to be undervalued. The P/Earnings NTM ratio of The Walt
Disney Company is significantly higher than the median of its peer group: around 13.00. The
company valuation of The Walt Disney Company according to these metrics is way above the
market valuation of its peer group.

The P/Earnings NTM ratio of The Walt Disney Company is significantly higher than the average
of its sector (Broadcasting & Entertainment): 14.19. The company valuation of The Walt Disney
Company according to these metrics is way above the market valuation of its sector.

The P/Earnings NTM ratio of The Walt Disney Company is significantly higher than its
historical 5-year average: 22.4. The (current) company valuation of The Walt Disney Company
is therefore way above its valuation average over the last five years.

Using a multiples approach we generated a valuation of $119.60 (USD).

DCF VALUATION APPROACH

The Discounted Cash Flow (DCF) valuation is a cash flow model where cash flow projections
are discounted back to the present to calculate value per share. DCF is a common valuation
technique especially for companies undergoing irregular cash flows such as resource companies
(mining, forestry, oil and gas) going though price cycles or smaller companies about to generate
cash flow (junior exploration companies, junior pharma, technology firms).

Assumptions  
Tax Rate 30%
Discount Rate 8%
Perpetual Growth Rate 4%
EV/EBITDA Multiple 7.0x
Transaction Date 31-12-2014
Fiscal Year End 30-06-2015
Current Price 172.89
Shares Outstanding 1,666
Debt 38,129
Cash 5,984
Capex 1,177

DCF Entry 2015 2016 2017 2018 2019 Exit

Date 2014 2015 2016 2017 2018 2019 2019
Time Periods   0 1 2 3 4  

EBIT 13,171 14,202 13,775 14,804 10,647  

Less: Cash
Taxes   3,951 4,261 4,133 4,441 3,194  

Plus: D&A   2,354 2,527 2,782 3,011 4,167  

Less: Capex   1,177 1,177 1,177 1,177 1,177  

Less: Changes
in NWC   375 611 398 511 272  

Unlevered FCF   10,022 10,680 10,850 11,686 10,171  

(320,180
(Entry)/Exit )           235,970

Transaction CF - 5,011 10,680 10,850 11,686 10,171 235,970

(320,180
Transaction CF ) 5,011 10,680 10,850 11,686 10,171 235,970
 Cash Flow
$14,000
$11,686
$12,000 $10,850
$10,680
$10,171
$10,000

$8,000

$6,000 $5,011

$4,000

$2,000

$0
6/30/2015 6/30/2016 6/30/2017 6/30/2018 6/30/2019

Terminal Value    
Perpetual Growth   347,235
EV/EBITDA   124,705
Average   235,970

Intrinsic Value    
Enterprise Value   210,329
Plus: Cash   5,984
Less: Debt   38,129
Equity Value   178,184
     
Equity Value/Share   106.95

Market Value    
Market Cap   288,035
Plus: Debt   38,129
Less: Cash   5,984
Enterprise Value   320,180
     
Equity Value/Share   172.89

Rate of Return    
Target Price Upside   -38%
Internal Rate of Return (IRR)   -3%
     
 Market Value vs Intrinsic Value    
Market Value   172.89
Upside   (65.94)
Intrinsic Value   106.95

  2016 2017 2018 2019

Current Assets 16,966 15,889 16,825 28,124
Current Liabilities 16,842 19,595 17,860 31,521
NWC 124 -3706 -1035 -3397

Based on the analysis that we conducted in this assignment, we found that the Walt Disney
Company is to be undervalued.

WEIGHTED AVERAGE COST OF CAPITAL

The weighted average cost of capital (WACC) is the rate that a company is expected to pay on
average to all its security holders to finance its assets. The WACC is commonly referred to as the
firm's cost of capital. In a word, a company's assets are financed by debt and equity. WACC is
the average of the costs of these sources of financing, each of which is weighted by its respective
use in the given situation. By taking a weighted average, we can see how much interest the
company has to pay for every dollar it finances.
 WACC = E/(E + D)* Cost of Equity + D / (E + D)* Cost of Debt * (1 - Tax Rate)

 Weights:

Generally speaking, a company's assets are financed by debt and equity. We need to calculate the
weight of equity and the weight of debt. The market value of equity (E) is also called "Market
Cap". As of today, The Walt Disney Co's market capitalization (E) is $313014.758.

The market value of debt is typically difficult to calculate. It is simplified by adding the latest
two-year average Short-Term Debt & Capital Lease Obligation and Long-Term Debt & Capital
Lease Obligation together. As of 2019, The Walt Disney Co's latest two-year average Short-
Term Debt & Capital Lease Obligation was $7284 Mil and its latest two-year average Long-
Term Debt & Capital Lease Obligation was $45523 Mil. The total Book Value of Debt (D) is
$52807 Mil.

a) Weight of equity = E / (E + D) = 313014.758 / (313014.758 + 52807) = 0.8556

b) Weight of debt = D / (E + D) = 52807 / (313014.758 + 52807) = 0.1444

 Cost of Equity:

We used Capital Asset Pricing Model (CAPM) to calculate the required rate of return. The
formula is:

Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the
Market - Risk-Free Rate of Return)

a) It is used 10-Year Treasury Constant Maturity Rate as the risk-free rate. It is updated daily.
The current risk-free rate is 0.95000000%. If the data for that country/region is not available,
then we will use the 10-Year Treasury Constant Maturity Rate of the United States as default.

b) Beta is the sensitivity of the expected excess asset returns to the expected excess market
returns. The Walt Disney Co's beta is 1.17.

c) (Expected Return of the Market - Risk-Free Rate of Return) is also called market premium.
Required market premium to be 6%.

Cost of Equity = 0.95000000% + 1.17 * 6% = 7.97%

  Cost of Debt:

We used last fiscal year end Interest Expense divided by the latest two-year average debt to get
the simplified cost of debt.

The Walt Disney Co's interest expense (positive number) was $1647 Mil. Its total Book Value of
Debt (D) is $52807 Mil.

Cost of Debt = 1647 / 52807 = 3.1189%.

 Multiply by one minus Average Tax Rate:

The latest two-year average tax rate is used to do the calculation.

The latest Two-year Average Tax Rate is -9.185%.

The Walt Disney Co's Weighted Average Cost of Capital (WACC) is calculated as:

WACC = E / (E + D) * Cost of Equity + D / (E + D) * Cost of Debt * (1 - Tax Rate)

= 0.8556 * 7.97% + 0.1444 * 3.1189% * (1 – (-9.185%)) = 7.31%