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the Walt Disney

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the Walt Disney

  1. 1. The Walt Disney CO. Yang Li Current Price: $95.17 - February 18, 2016 Projected Price: $101.9055 Recommendation: BUY (3.88/5.00) (50% buy; 44.1% hold; 5.9% sell) 
 FNCE 6330 INVESTMENT MANAGEMENT ANALYSIS PROFESSOR YOSEF BONAPARTE 1
  2. 2. Introduction Review: As the 11th World's Most Valuable Brand (forbes.com), the Walt Disney Company (DIS) has a $159.32 billion market cap (Bloomberg Terminal). It was found on October 16, 1923 in Los Angeles, California by Walt Disney and Roy O. Disney. It operates through five business segments: Media Networks, Studio Entertainment, Interac- tive Media, Theme Parks & Resorts, and Consumer Products. “The company produces motion pictures, televi- sion programs, and musical recordings, as well as books and magazines” (Bloomberg Terminal). Its profit ranks as the 58th in the world and its market value ranks the 33rd in the world (forbes.com). In 2016, Fortune named the Walt Disney Company on its list of "World's Most Admired Companies". Disney is No. 1 on the entertain- ment industry list and ranked high in Fortune's "Key Attributes of Reputation," which include innovation, social responsibility and global competitiveness (disney.com). It is an American diversified multinational mass media and entertainment conglomerate. In the past 5 years, the company’s stock price increased from $41.76 to $98.23. However, there were two major price drop for DIS, which happened from July 27th to September 21st in 2015 and from November 16th 2015 to February 8th 2016. Because the DJI dropped 6.36% on August 24th 2015, which is known as the 2015-2016 stock market selloff, the Walt Disney Company’s stock was also influenced by the 33 points downward momen- tum over several days (Heather Long). The market selloff started in June 12 in Shanghai composite index which shed 38% of its value. However, it took the Disney no more than 2 months to recover from the “market selloff”. The most recent significant price drop happened when China halted trading in its market again following a 7% FNCE 6330 INVESTMENT MANAGEMENT ANALYSIS PROFESSOR YOSEF BONAPARTE 2
  3. 3. plunge. “The big selloff on Wall Street to start 2016 is now the worst four-day start to the year ever” (Adam Shell). In general the U.S. Economy will be in a good condition in 2016. the GDP growth rate for 2016 is 2.8%. The unemployment rate is 4.9% and the inflation rate will be 2.0%. The entertainment industry is a constantly evolv- ing group of corporations with limited competitive pressures because there are only 6 public traded companies in this industry (Bloomberg Terminal). As long as the economy is good and people have spare time as well as money, they will spend more on movies and bring their kids to the Disney theme parks. However, the economic downturn would influence the company’s profit. Previous tough economic condition has had a noticeable nega- tive impact. Large mergers and acquisitions throughout 2009 and 2010, including Disney’s acquisition of Pixar and Marvel, and the merger of Comcast and NBC Universal fluctuated companies’ stock price in the entertain- ment and broadcasting industry (Rachel Austin). Models: Analyst Consensus: Analysts from Bloomberg recommended to “buy” the DIS stock and gave 3.88 out of the 5 as the average rec- ommendation, where 1 is a strong sell and 5 is a strong buy. The maximum price and the minimum price was from the two-year historical price. Apply all those data into the equation below, we get the 1-year forward pro- jected price as $107.50 PSpot + (X – 2.5)*(PMAX - PMIN)/5 $95.17 + (3.88 - 2.5)*($121.69 - $77.01)/5 = $107.50 CAPM Model: The beta (Bj) of Walt Disney Company is 1.043 which offers the possibility of a higher rate of return, but in- vestors also bearing more risk (Bloomberg Terminal). The market risk rate is derived from the S&P 500 index and the risk free rate is the 3-month treasure bill rate. CAPM model indicates the risk rate of DIS stock is 9.02%. We imply this rate to the projected price equation to get the $103.75 projected price. Rj = Rf + Bj *[ RM - Rf] Pj = P0 *(1+ Rj) 1.35%+1.043*(8.71% - 1.35%) = 9.02% $95.17 * (1+0.0902) = $103.75 FNCE 6330 INVESTMENT MANAGEMENT ANALYSIS PROFESSOR YOSEF BONAPARTE 3
  4. 4. Ratio Valuation: Another method is multiplying the forward EPS (based on GAAP) — 5.91 by the forward P/E ratio — 16.88. We get the 1-year forward projected price from Ratio Valuation Model as $99.76. Pj = P/E * EPSj 16.88*5.91 = $99.76 (Pj) DDM - Discounted Dividend Model (See Appendix): Pj 0 = D1/(1+r) + D2/(1+r)2+……+ D10/(1+r)10 + P10/(1+r)10 Where P10= D11/(r - g) Dividend per Share = $1.466 (D1) Growth Years = 7 years Long Term Growth Rate = 10.15% (g) Theoretical Price = $72.592 (Pj 0) FCFE Model - free cash flow to equity model (See Appendix): Market Price/Share = $98.91 Intrinsic Value/Share = $834.67 Projected Price: Since the projected price derived from Discounted Dividend Model is too small than the other models, it should be dropped to avoid a large standard deviation (outliers) of the data. Then I weighted those models as 25% of FCFE model, 30% of CAPM model, 30% of Ratio Valuation model, and 15% of Analyst Consensus model. The weighted average projected price is $101.9055. 0.15*$107.5 + 0.30*$103.75 + 0.30*$99.76 + 0.25*$98.91= $101.9055 Based on the method each model uses, I weighted them differently. Because analysts’ knowledge background are varied, Analyst Consensus model is influenced by analysts’ bias. I gave it the lowest weight in the final pro- jection. FNCE 6330 INVESTMENT MANAGEMENT ANALYSIS PROFESSOR YOSEF BONAPARTE 4
  5. 5. The beta in CAPM model is estimated using linear regression. The change of the time period where beta is ab- stracted will influence the accurate of the value of the beta. Unique events such as economic crisis in 2008 would fluctuate the calculation of the beta. However, the theory behind the CAPM model is logical compared with other models. The use of beta classifies different stock into two categories which are defensive stock and aggressive stock. CAPM model also generates the market risk premium. However the numerical value of the risk premium is based on the time range analyst use. Tow variables in Ratio Valuation model are based on the company’s annual report. If the company is ethical and the EPS and P/E ratio they reported are not fraudulent, this model is good to use. Because FCFE model are generated from company’s cash flows in the past several years. Cash flow is the movement of money into or out of a business from operating, investment, and financing activities. Cash flow is the engine of a company and is vital important to the health of a business. A company that is heavily in debt is hard to finance its new projects. The Walt Disney is abound of cash. Sensitivity Analysis: The analysis above indicates that every model has its bias either form the analysts or the benchmark it uses for variables. Sensitivity analysis shows the different values of each independent variable will change the value of the dependent under a given set of assumptions. Analyst Consensus: Stock price are less volatile in the past 2 years and more volatile in the past 5 years or the past 10 years. The 2008 financial crisis is a unique events that would probably not happen in the next 12 month, I choose to calcu- late the projected price again using 5-year maximum stock price ($121.69 on August 4th, 2015) as well as the minimum stock price ($29 on October 3rd, 2011). The new projected price is $120.752. CAPM Model: Instead of using the value of beta provided by Bloomberg Terminal, I could use the one given by Yahoo Finance which is 1.56073. Because the regression model for beta is run based on a different time range, the value of beta is different from different source. The new projected price is $107.39 given the projected rate of return as 12.84%. The stock price is not sensitive and is around $110. FNCE 6330 INVESTMENT MANAGEMENT ANALYSIS PROFESSOR YOSEF BONAPARTE 5
  6. 6. Conclusion: There are four reasons that I suggest to buy the stock. First of all, the projected price will be $101.91 which is higher than the current price — $95.17. Secondly, it also has a strong analyst consensus valuation, which is 3.88 out of 5 (Bloomberg Terminal). Thirdly, the Walt Disney CO. has a strong cash flow and the industry is prof- itable with limited competitor. Finally, its stock price is not sensitive. FNCE 6330 INVESTMENT MANAGEMENT ANALYSIS PROFESSOR YOSEF BONAPARTE 6
  7. 7. Reference 1. http://www.forbes.com/companies/walt-disney/ 2. Heather Long. The stock market drop...by the numbers. (CNN Money) http://money.cnn.com/ 2015/08/24/investing/stocks-market-crash-by-the-numbers/ 3. Adam Shell. S&P 500 off to worst-ever start to year. (USA Today) http://www.usatoday.com/story/ money/markets/2016/01/06/china-stocks/78390650/ 4. Rachel Austin, Jessica Elia, Jessica Reed, Jenni Torres. Entertainment Industry Analysis. http:// www.csus.edu/indiv/h/hattonl/documents/entertainmentindustryanalysis.docx. Appendix FNCE 6330 INVESTMENT MANAGEMENT ANALYSIS PROFESSOR YOSEF BONAPARTE 7
  8. 8. FNCE 6330 INVESTMENT MANAGEMENT ANALYSIS PROFESSOR YOSEF BONAPARTE 8 Discounted Cash Flow Valua3on Unit (USD Million) Market Assump-ons Valua3on Model Risk-free Rate 1.3500% Market Risk Premium 8.7100% Cal. Year Year Gr. Rate FCF ($M) Term. Val. Total PV 2015 0 20.20% 6,644.00 6,644.00 Equity Assump-ons 2016 1 2.00% 7,986.10 7,986.10 7,520.32 Beta 1.043 2017 2 10.00% 8,145.82 8,145.82 7,223.35 Cost of Equity 10.4345% 2018 3 5.00% 8,960.40 8,960.40 7,482.26 MV of Equity est (SM) 48,655.00 2019 4 8.00% 9,408.42 9,408.42 7,398.16 2020 5 20.20% 10,161.10 10,161.10 7,524.01 Debt Assump-ons 2021 6 5.53% 12,213.66 1,942,365.07 1,954,578.73 1,362,899.04 Pre-Tax Cost of Debt 1.5200% Effec3ve Tax Rate 35.9700% Firm Value 1,400,047.15 AZer-Tax Cost of Debt 0.9733% MV of Debt est (SM) 39527.00 Debt Value 39,527.00 Equity Value 1,360,520.15 Firm Assump-ons Shares Outstanding 1,630.00 Firm Value est (SM) 88,182.00 Debt-to-MV Ra3o 45% Intrinisc Value/Share 834.67 WACC 6.1936% Ini3al Cash Flow ($M) 6644.00 Market Price/Share 98.91 Long-Term (Terminal) Growth Rate 3.00% Market Cap 161230.00 Analysis of Historical FCF Data $M %Chg 2011 3435.00 2012 4182.00 21.75% 2013 6656.00 59.16% 2014 6469.00 -2.81% 2015 6644.00 2.71% Average Cash Flow 5477.20 Geometric Avg Growth Rate 20.20%

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