As always you can see my blog post on my website I have photos on there.
Business Overview
I think everyone kind of knows what Disney does. They are a entertainment / experience company. They make movies, charge you money to experience their parks. From the day you are born Disney gets you hooked on their IP. They first get you with children’s animated films & TV shows such as Frozen, Toy Story, and Mickey Mouse. When you get a bit older Disney hits you with their Marvel & StarWars series. If you are not a fan of those fantasies you can also watch sports with ESPN.
Then later in life, you have a kid then they want to experience this all over again! You go to Disney World and pay a premium for that park. For a 2 day pass for a family of four will run you about $1,000! Not only do you need to pay for admission you have to pay for food, merchandise and stay all within Disney. You can go to a different park, but you can only experience Mickey, Frozen, at one of Disney’s Parks! I call this the circle of entertainment! As long as Disney makes their experience magical, people will keep coming to their parks and watch their movies.
How does Disney Make Money?
Based on Disney’s 10-k (annual report) they split their revenue into 4 different categories.
Media Networks
This section is cable networks & broadcasting networks. ESPN, Disney Channel, ABC, domestic TV networks. They own certain % of some other channels such as VICE, A&E, Hulu, BAMTech, History, Lifetime, etc..
Parks & Resorts
This portion of revenue consists of Disney World (Florida), Disney Land (California), Disney Resort & Spa in Hawaii, Disney Cruise Line, Paris, Hong Kong, Shanghai, Japan. In the international parks, Disney co-owns the parks with different companies. They make money on tickets, food, merchandise sold in these parks, hotel stays and rentals at these properties.
Studio Entertainment
This portion of the revenue comes from the distribution of films under Pixar, Marvel, Lucasfilms, and Touchstone. They also make revenue through licensing music, Disney Theatrical Group, and Paid Television.
Consumer Goods & Interactive Media
Finally, this is Disney’s fastest growing section of their revenue. However, it is still their smallest out of the 4. Disney’s essentially license characters to toy, gaming companies so these 3rd party companies so that these 3rd party companies can use Disney’s IP's such as Mickey, StarWars characters, Frozen Characters.
Disney’s Competitive Advantage?
Disney’s main competitive advantage is their IP. The own properties like their Marvel Universe, StarWars, and other Disney characters. Without these properties all of their revenue streams become essentially useless. No one will go to their parks, they will not have pricing power when licensing their IP, people will stop watching Disney shows if Disney’s fantasy experience was the best. Also since Disney’s owns these IP forever until they either sell it or people stop watching, they have government’s protection that no one can copy Disney’s IP without Disney getting paid for them.
Also since these Parks are so big and so much capital is needed to even start thinking about building a park, a competitor who is want to compete has to has to either take a huge risk or borrow a lot of money, or have better IP to take customers from Disney parks.
Disney competitors are any streaming sites like Netflix who are building out their own IP, Dreamworks, and other entertainment companies that create experiences.
Disney’s Business & Growth Strategy?
Disney’s primary strategy is to protect their competitive advantages and leverage their competitive advantage to make more money. One of the ways Disney is trying to do this is through creating their own digital streaming service. In the 3rd quarter, 2017 earnings call the Bob Iger (CEO) said
"(BAMTech) gives us immediate access to the team and the technology we need to deliver the highest quality direct-to-consumer experience, which ultimately gives us much greater control of our own destiny in a rapidly changing market."
This allows Disney to distribute content through including sports through one direct-to-consumer service. Mr. Iger also mentioned that people will be able to pick and choose which sports events and content to view.
"Ultimately, we envision this will become a dynamic sports marketplace that will grow and be increasingly customizable, allowing sports fans to pick and choose content that reflects their personal interests. Our new direct ESPN service will be available to consumers in early 2018."
This is going toward the Netflix model and having their own streaming service with their own content. Hopefully we can get a StarWars TV series!!!!!!!!
Also one thing to note is that Disney pays a high tax rate of around 35% and with the new corporate tax cut at 20% (predicted, hope? Idk what Trump actually will do) will be sooooooo huge. Just the tax cut and if everything stays the same as 2016’s numbers, Disney stock could jump 20% instantly.
Risks?
As with any company there are risks. Disney is losing a TON domestic ESPN subscribers. Since 2010 ESPN has lost over 10+ million subscribers! However, they are still growing their international ESPN Channels.
They have lost over 7 million domestic Disney Channel subscribers. This is really showing that people are cord cutting and saying that cable TV is just not worth it anymore. On the other hand their international Disney have been growing. In 2012, 155 million international Disney Channel Subs vs 205 million in 2016.
Finally, this BAMTech investment to move their traditional TV subscribers over to streaming is a huge move and can either backfire. Disney will be ending their relationship with Netflix and any Marvel series outside the ones Disney licensed will probably only be available through this streaming website.
Disney’s Revenue, Cash & Debt?
Numbers time! Disney’s Revenue in 2016
To sum it up: Cable Networks + Broadcasting = Media Networks. Total Revenue has been growing pretty slow at around 4% annually.
As of Q3 2017, Disney had debt of $18.85 Billion that is on the balance sheet. As of Q3 2017, Disney had cash & cash equivalent of $5.30 Billion that is on the balance sheet. As of Q3 2017, Disney had investments of $4.28 Billion that is on the balance sheet. As of Q3 2017, Disney had attractions, real estate of $52.93 Billion that is on the balance sheet. As of Q3 2017, Disney had attractions, real estate of $20 Billion that is depreciated on the balance sheet, but really these are assets and great for companies to “hide” their assets and lower their taxable income.
So we have net assets of $63 Billion and possibly more since they have been depreciating these properties every single year. If we just bring back 50% of the last 2 years of depreciation, we can add back $20 Billion into the net assets.
Disney’s Operating Income / Margins / Net Income?
As you can see Disney makes about $15.72 Billion dollars in income before taxes. Operating Income = Revenue – Cost of Goods – Operating Expenses
Here you can see Disney’s operating margins. Disney’s total operating margins are about 28% and even with the ESPN loss, they are growing their margins and income. However, the cable networks sector which ESPN is a part of has the highest operating margin.
By looking at the entire Cable Networks margin, it doesn’t look like that sector has lost pricing power since their margins are staying constant over 8 – 10 years.
Disney’s Free Cash Flow & Capital Expenditure?
Ohhhhhh yes! My favorite step of my valuation.
From 2007 – 2016, Disney has been growing their cash flow at around 9% every year. This is pretty great since they have been growing their revenue at only 4% which mean that the company is getting more and more efficient.
$8.44 Billion in Free Cash Flow. If free cash flow grows at 9%, by the end of 2017, Disney’s free cash flow is estimated to be around $9B. If we subtract DIS market cap with the net cash/assets we get a value of Disney business at $88.5B. So in 9-10 years we can get our money back if we owned the entire company. I think this is a pretty great deal since I believe this company is going to be around for at least another 30+ years.
Disney’s Other Important Metrics?
Since Disney makes money per subscriber, let’s look at that real quick.
You can see how ESPN loosing subscribers every year, however overall Disney Channel is still growing very very slowly.
Disney’s Potential Return & Margin of Safety?
I believe with the new streaming service with strong pricing power their IP has will keep a growth rate between 7.5% – 9%. Also we will use the 18x free cash flow multiple based on historical data.
IF we use 8% as our free cash flow growth rate and 18x multiple, In 10 years Disney’s Free Cash flow will be $18 Billion and the market cap of Disney will be $324 Billion. If we add in all the cash flow we have received in those 10 years I see a return of 18% annually if nothing goes wrong. If we give a margin of safety of 50%, I see the company returns at 10% annually.
Sum of 10 years of cash flow + Future cash flow in year 10 * 18 multiple = $460 Billion
50% margin of safety = $230 Billion
Disney’s Potential Return & Margin of Safety?
To summarize, because of Disney’s strong competitive advantage in their IP, new growth in online streaming, and free cash flow growth is what makes Disney a great investment.
Disclosure: I own shares of Disney
Submitted November 07, 2017 at 01:36PM by stock_market_noob http://ift.tt/2yDk9WN
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