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Disney Analysis
1.0 Corporation Overview
For many years, Disney has been in the family entertainment field since 1920 (Bryman 50). The company is located in Burbank, California. Disney has become the global corporation in the provision of quality entertainment across the United States and around the globe. Along with its subsidiaries, Disney operates in five segments such as media networks, studio entertainment, parks and resorts, interactive media, and consumer products. The company was originally founded by Roy Disney and Walt as cartoon studio. Currently, Disney has 166,000 employees working full time in all of its business segments in the entertainment industry. The company was ranked number 66 on the Fortune 500list in 2012 and 226 position on the Global Fortune 500 list.
2.0 Objective and methods
This paper aims at evaluating Disney’s financial performance using vertical and horizontal trend analysis, in comparison to competitors and industry. The analysis will employ other methods such as WACC, working capital analysis, NPV, IRR, and technical analysis.
3.0 Financial statement analysis
3.1 Vertical analysis
Income statement
In a vertical analysis of the income statement, net sales revenues are used as the base line item where all other items are expressed as a percentage component (Fridson, FridsonAlvarez 526). The percentage components of net sales, such as cost of goods sold (mark-up ratio), gross profit (gross profit margin), operating profit (operating profit margin), and net profit (net profit margin), indicate the profitability level of the company. Table 1 indicates the vertical analysis of Disney Corporation for the last five years.
2014 / 2013 / 2012 / 2011 / 2010Net Sales Or Revenues / 100.00% / 100.00% / 100.00% / 100.00% / 100.00%
Cost Of Goods Sold / 54.12% / 79.02% / 79.04% / 80.97% / 82.33%
Gross Profit / 45.88% / 20.98% / 20.96% / 19.03% / 17.67%
Selling General And Admin Expense / 17.83% / 0.48% / 0.24% / 0.13% / 0.71%
Income Before Depreciation Depletion Amortization / 28.04% / 20.51% / 20.73% / 18.89% / 16.96%
Non Operating Income / 1.69% / 1.37% / 2.05% / 1.61% / 1.52%
Pre-tax Income / 25.09% / 21.36% / 21.90% / 19.67% / 17.41%
Income Before Extraordinaries And Disc Operations / 16.40% / 14.73% / 14.60% / 12.86% / 11.33%
Net Income / 15.37% / 13.62% / 13.44% / 11.76% / 10.41%
Table 1: Vertical Analysis
Comment on vertical analysis
The ratio of cost of goods sold to net sales (mark-up ratio) shows the percentage of marginal cost of selling goods. According to Table 1, mark-up ratio has been steadily decreasing from 2010 to 2014. Such a trend can be attributed to the decreasing cost of selling entertainment products. This can be reflected in the gross profit, which has been increasing since 2010. Therefore, the decrease in the mark-up ratio indicates that the profitability level has also increased. The ratio of gross profit to net sales (gross profit margin) indicates the percentage of profit available for meeting the operating expenses and financial cost. Gross profit margin has been increasing steadily since 2010 and this is an indication that the company’s profitability level. The ratio of operating income (IBDDA) to net sales (operating profit margin) indicates the percentage of profit available to cater for financial cost. Operating profit margin has also been increasing. The ratio of net profit to net sales (net profit margin) indicates the percentage of profit available for reinvestment and dividend payouts. The net profit margin has been steadily increasing since 2010.
Balance sheet
In the vertical analysis of the balance sheet, total asset is taken as a base, from which all other line items, such as current assets, non-current assets, total liabilities, and shareholders’ equity, are expressed as a percentage component (Fridson, Fridson & Alvarez 526). Table 2 indicates the vertical analysis of Disney Corporation’s balance sheet for the last five years.
2014 / 2013 / 2012 / 2011 / 2010Total Current Assets / 18.03% / 17.37% / 18.30% / 19.07% / 17.66%
Total Non-current Assets / 81.97% / 82.63% / 81.70% / 80.93% / 82.34%
Total Assets / 100.00% / 100.00% / 100.00% / 100.00% / 100.00%
Total Current Liabilities / 36.91% / 35.37% / 38.90% / 37.00% / 36.83%
Total Non-current Liabilities / 63.09% / 64.63% / 61.10% / 63.00% / 63.17%
Total Liabilities / 42.77% / 40.73% / 43.98% / 45.30% / 43.15%
Shareholders’ Equity / 57.23% / 59.27% / 56.02% / 54.70% / 56.85%
Total Liabilities And Shareholders’ Equity / 100.00% / 100.00% / 100.00% / 100.00% / 100.00%
Table 2: Vertical Analysis of Balance sheet
Comment on vertical analysis of Disney’s balance sheet
The proportion of current and non-current assets have relatively stable for the last five years. Additionally, current and non-current liabilities have also remained stable for the last five years as indicated in Table 2. The ratio of total liabilities to total assets (debt ratio) evaluates the amount of debt capital financing the company’s assets. Disney’s debt ratio has remained stable at 42 %. The ratio of shareholders’ equity to total assets (equity ratio) evaluates the proportion of company’s assets financed through equity capital. The equity ratio has remained stable at 57 %.
3.2 Horizontal analysis
The horizontal analysis of financial statements uses the previous year line items as a base year to express the increase or decrease in the next’s year line item as percentage form. Horizontal analysis indicates a trend in the line items.
Income statement
2014 / 2013 / 2012 / 2011Net Sales Or Revenues / 8.37% / 6.54% / 3.39% / 7.44%
Cost Of Goods Sold / -25.77% / 6.51% / 0.92% / 5.66%
Gross Profit / 136.96% / 6.62% / 13.91% / 15.69%
Selling General And Admin Expense / 3967.76% / 114.00% / 81.82% / -79.63%
Income Before Depreciation Depletion Amortization / 48.20% / 5.40% / 13.42% / 19.67%
Non Operating Income / 32.96% / -28.52% / 31.21% / 13.79%
Interest Expense / -109.79% / -36.31% / 7.58% / -16.14%
Pretax Income / 27.30% / 3.89% / 15.13% / 21.37%
Provisionfor Income Taxes / 42.16% / -3.34% / 10.84% / 20.35%
Minority Interest / 0.60% / 1.83% / 8.87% / 28.86%
Income Before Extraordinaries And Disc Operations / 20.61% / 7.50% / 17.40% / 21.91%
Net Income / 22.25% / 7.99% / 18.20% / 21.30%
Table 3: Horizontal analysis of income statement
Comment
The percentage change in net sales for the four years has been positive; implying that the net sales revenue has been steadily growing. The cost of goods sold has also been increasing in 2011, 2012, and 2013 as indicated by the positive percentage change. However, in 2014, the cost of goods sold decreased by 25.77 % and this is a significant decrease in the prices of inputs in the entertainment industry. The selling general and administration expenses are operating expenses have been increasing exponentially since 2012 and this is a sign of decreased operational efficiency. The net profit has been decreasing from 2011 to 2013, but increased in 2014.
Balance sheet
2014 / 2013 / 2012 / 2011Cash / -12.97% / 16.06% / 6.34% / 17.01%
Receivables / 12.27% / 6.53% / 5.79% / 6.88%
Inventory / 5.85% / -3.25% / -3.64% / 10.61%
Other Current Assets / 36.83% / -23.21% / -19.68% / 22.75%
Total Current Assets / 7.56% / 2.92% / -0.35% / 12.53%
Property Plant And Equipment / 2.60% / 6.76% / 8.64% / 8.03%
Accumulated Depreciation / 5.62% / 8.57% / 5.70% / 6.53%
Net Property Plant And Equipment / 4.25% / 4.03% / 9.23% / 10.61%
Investment And Advances / -5.37% / 4.63% / 11.83% / -3.10%
Deferred Charges / 11.33% / 5.33% / 4.22% / -8.72%
Intangibles / 1.79% / 15.17% / 2.94% / 0.29%
Deposits And Other Assets / -3.46% / 6.03% / -12.47% / -3.47%
Total Assets / 3.63% / 8.47% / 3.85% / 4.22%
Accounts Payable / 11.64% / 6.41% / 0.49% / 4.14%
Current Portion Of Long Term Debt / 43.12% / -58.16% / 18.30% / 30.00%
Other Current Liabilities / 4.25% / 20.78% / 5.05% / 5.12%
Total Current Liabilities / 13.57% / -8.66% / 6.00% / 9.89%
Deferred Charges Taxes Income / 1.19% / 79.92% / -21.46% / 8.97%
Long Term Debt / -0.78% / 19.44% / -2.06% / 7.82%
Other Long Term Liabilities / 30.28% / -36.47% / 5.65% / 11.32%
Total Liabilities / 8.82% / 0.46% / 0.82% / 9.40%
Common Stock Net / 2.57% / 5.39% / 4.74% / 5.43%
Retained Earnings / 12.51% / 11.16% / 11.96% / 11.79%
Treasury Stock / 18.87% / 9.19% / 10.52% / 21.10%
Other Liabilities / -18.38% / -243.77% / 89.86% / 868.97%
Shareholders’ Equity / 0.06% / 14.76% / 6.35% / 0.28%
Total Liabilities And Shareholders’ Equity / 3.63% / 8.47% / 3.85% / 4.22%
Table 4: Horizontal analysis of balance sheet
Comment
The current assets have been increasing for the last four years, except in 2012 where it decreased by 0.35%. Additionally, total assets, current liabilities, total liabilities, and shareholders’ equity has also been increasing as they all exhibit a positive percentage changes.
4.0 Industry and competitor ratio
The industry and competitor ratios include profitability, liquidity, efficiency and financial leverage ratios. They provide quantitative analysis of the financial performance of the company in relation to competitors and industry average ratios. According to Finance.Yahoo.com, the direct competitors of Disney Company include Twenty-First Century Fox, Inc., Time Warner, Inc., and Comcast Corporation. The following Table 5 shows industry and competitor ratio in 2014, profitability ratios.
DIS / FOXA / TWX / CMCSA / IndustryRevenue Growth / 0.09 / -0.23 / 0.05 / 0.11 / 0.13
Gross Margin / 0.25 / 0.36 / 0.44 / 0.70 / 0.40
Operating Margin / 0.25 / 0.20 / 0.26 / 0.22 / 0.07
EPS / 4.90 / 3.81 / 4.39 / 3.19 / 0.09
P/E / 24.50 / 7.89 / 16.09 / 19.73 / 23.58
Table 5: Industry and Competitor ratios (source: Finance.yahoo.com)
Disney’s revenue growth is 9 % and this is higher than that of Twenty-First Century Fox (-23%) and Time Warner (5%), but lower than that of Comcast Corporation. The industry’s revenue growth is 13 % and thus, Disney has underperformed in relation to industry performance. In terms of gross margin, Disney has 25 % and this profitability ratio is less than those of Twenty-First Century Fox (36 %), Time Warner (44%), and Comcast (70%). This implies that Disney has performed poorly in generation of gross profit in relation to its competitors. In addition, the company has underperformed in comparison to industry average gross margin (40%). However, Disney has performed well as far as operating margin is concerned due to increased operational efficiency. Disney’s earnings per share is $ 4.90 and this ratio is higher than those of Twenty-First Century Fox ($ 3.81), Time Warner ($4.39), and Comcast ($ 3.19). The industry’s earnings per share is $0.09. Thus, Disney is providing value to its shareholders compared to its competitors. Furthermore, Disney has higher Price/Earnings ratio (24.5) and this implies that the investors are expecting higher earnings growth and returns in Disney than the competitors.
Short- and long-term solvency
DIS / FOXA / TWX / CMCSACurrent ratio / 1.03 / 2.17 / 1.44 / 0.60
Acid-test ratio / 0.90 / 1.75 / 1.01 / 0.60
Long-term Debt ratio / 0.14 / 0.39 / 0.30 / 0.28
Debt to equity / 0.39 / 1.24 / 0.97 / 0.92
Interest coverage / 60.68 / 4.47 / 5.30 / 6.06
Short-term solvency ratios such as current and acid test ratio evaluate the company’s ability to meet its short-term financial costs. Current ratio of 2.00 and above is recommended and indicates that a company’s assets are sufficient enough to meet financial debt costs at their disposal. For Disney, TWXand CMCSA, their current ratios are less than 2.00 and this shows that they have difficulties in meeting their financial debt. An acid test ratio of 1.00 and above is recommended and indicates that a company’s liquid assets are sufficient enough to meet financial debt costs at their disposal. The acid test ratios for FOXA and TWX indicate that their liquidity level is higher, but the acid test ratios for DIS and CMCSA indicate their liquidity level is relatively lower.
Long-term solvency ratios such as long-term debt ratio, debt-to-equity, and interest coverage evaluate the solvency of the company by comparing debt with assets and shareholders’ equity. Disney’s long term debt ratio is the lowest in comparison to those of FOXA, TWX, and CMCSA; implying that Disney’s long term debt burden is lower compared to its competitors. Additionally, Disney’s debt to equity is the lowest in comparison to those of FOXA, TWX, and CMCSA; implying that Disney’s operating activities are highly financed through equity. Disney has the highest interest coverage ratio and this indicates that the company’s EBIT is large enough to cover for interest obligations. Therefore, Disney has the lowest business risks of bankruptcy, insolvency, and credit risk, in comparison to its competitors.
5.0 Forecast: Compound Annual Growth Rate, CAGR
CAGR is defined as the mean annual growth rate of an investment over a period longer than one year. In determining, CAGR, the value of an investment is divided by the value of its value at the beginning of the period, and the value raised by reciprocal of the power and then one is subtracted from the resultant outcome as follows:
If an investor invested $10,000 five years ago, today the investor could have $33,282 and the CAGR would be:
= 27.2 %
6.0 Current Capital Investments
6.1 Weighted Average Cost of Capital
WACC is the rate in which Disney expects to pay on average the debt and equity to fund its assets. By determining WACC, it is possible to determine the amount of interest paid by the company for every dollar of capital (debt and equity) provided.
Weights
Disney’s market capitalization = $202,661.102 Mil
The latest two-year mean Short-Term and Long-Term Debt = $16,088 mil
Cost of equity
Cost of equity is determined by CAPM model
Cost of Equity = Risk-Free Rate of Return, Rf + Beta of Asset, b * (Expected Return of the Market, Rm - Risk-Free Rate of Return, rf)
Cost of equity = Rf + b (Rm-Rf)
The current Rf of 10-year Treasury Maturity Rate = 2.27 %
Beta, b = 1.57
Market premium = Rm –Rf = 7.5 %
Therefore,
The cost of equity = 2.27 % + 1.57 * 7.5 % = 14.045 %
Cost of debt
Interest expense in 2014 is used in determination of the cost of debt. The book value of debt = $16,088 Mil while the interest expense = $294 Mil.
Cost of debt = = 1.8274%.
Average Tax Rate
The average tax rate for Disney’s latest two years = 35.405%
WACC
=0.9265*14.045 % + 0.0735 * 1.8274 % * (1 - 35.405 %)
= 13.1 %
6.2 NPV
The Net Present Value of the company can be determined as from the last five years. Capital invested by Disney in 2010 (long-term debt + common stock) = 38,866
In millions / 2014 / 2013 / 2012 / 2011 / 2010Net Income / 7,501.00 / 6,136.00 / 5,682.00 / 4,807.00 / 3,963.00
Depreciation Depletion Amortization / 2,288.00 / 2,288.00 / 2,288.00 / 2,288.00 / 2,288.00
Cash flow / 9,789.00 / 8,424.00 / 7,970.00 / 7,095.00 / 6,251.00
Discount rate,WACC 13.1 % / 0.5404 / 0.6112 / 0.6912 / 0.7818 / 0.8842
discounted cash flow / 5,289.63 / 5,148.35 / 5,508.97 / 5,546.60 / 5,526.97
Accum. Discounted cash flows / 5,289.63 / 10,437.98 / 15,946.95 / 21,493.55 / 27,020.52
Total capital in 2010 / 38,866.00
total cash flows / 27,020.52
NPV / (11,845.48)
5.3 IRR
IRR can be determined through trial and error method.
When, discount rate = 13.1 %, NPV = -$11,845.48
When, discount rate = 0.1 %, NPV = $ 536.31
Discount rate that would give NPV = 0 is given as
= 0.006
Therefore, IRR = 0.001+0.006 = 0.007 or 0.7 %
The IRR is lower than the expected rate of return (13.1%).
7.0 Dividend Policy
Dividend policy encompasses financial policies concerning the payment of cash dividends at a later stage (Baker 55). Payment of dividends is determined by non-appropriated profit (excess cash) and long-term earning power. Disney has been giving cash dividends to its shareholders. In 2010, 2012, 2013, and 2014, the dividend payouts have been 0.17, 0.16, 0.19, 0.22, and 0.20, respectively. Cash dividends reduce the retained earnings that would affect the money to be reinvested back to the business.
8.0 Technical Analysis
Technical analysis is defined as the methodology for forecasting the direction stock prices through the evaluation of past market data (Charles & Julie 3). Technical analysis assists investors in anticipating the likely stock prices over time. The following charts indicate Disney’s technical analysis for the last five years:
According to Disney’s technical analysis, the stock prices have been increasing for the last five years. Therefore, the investors are expecting the prices to go up in the future.
Disney’s Moving Averages
The moving averages are used to indicate the trend of stock price of the company. There are two types of moving averages the Exponential Moving Average and Simple Moving Average. It is significant to note that the stretched the moving average, the more the lag is experienced. Disney’s 200-day moving averages indicate long-term trend and is pertinent to long-term investors.
Disney’s Bollinger Bands
In this case, Bollinger Bands is a measure of DIS Stock’s volatility. The current stock price is $118.67 and is in the lowest range of DIS’s Bollinger Bands.
Disney’s Relative Strength Index, RSI
RSI is a significant tool in the determination of oversold/ overbought stocks and determines the recent stock’s performance in respect to the company’s stock price history. In case, the DIS stock’s RSI rise beyond 70, it could signal an overbought condition and if it decreases beyond 30, it could imply an oversold condition.
9.0 Summary of analyst recommendations
According to finance.yahoo.com, Credit Agricole analyst firm (2nd Sept 2015) Disney outperformed. The current mean analyst recommendation is 2.3 out of 5.0; meaning that the company’s investors are expecting moderate returns for their investments. The outperform rating implies that investors are expecting the stock prices to go up and “Buy” decisions. According to Nasaq (2015), the investors should buy the company’s stock as the future stock prices are expected to increase. Disney’s PE ratio is 15.23 and this implies that the investors are expecting company’s earnings to grow and are also expecting higher return on investment in 2017. The PE ratio compares current market price of the stock to the earnings per share.
According to the Analyst estimates (finance.yahoo.com), the earnings are estimated to increase from 1.41 to 5.67. The stock prices are expected to go up and investors are recommended to buy the stocks. Based on CAPM model, investors are expecting 7.5 % rate of return. These recommendations can also be supported by financial ratios such as profitability and solvency ratios. Disney has higher level of profitability level and this implies that the company is capable of creating the value to stockholders. Furthermore, the solvency ratios of the company indicates that its business is less risky compared to competitors.
Works Cited
Baker, H K.Dividends and Dividend Policy. Hoboken, N.J: John Wiley, 2009. Internet resource.
Bryman, Alan. Disney & His Worlds, 2003. London: Routledge.
Charles & Julie.Technical Analysis: The Complete Resource for Financial Market Technicians, 2010. New Jersey, FT Press.
Fridson, Martin S, Martin S. Fridson, and Fernando Alvarez.Financial Statement Analysis: A Practitioner's Guide. Hoboken, N.J: Wiley, 2011. Print.
Nasaq.Walt Disney Company (The) Analyst Stocks Recommendations, 215 Available at:
Yahoo! Finance. Competitors, 2015. Available at:
Appendices
Disney’s Income statement
In millions / 2014 / 2013 / 2012 / 2011 / 2010Shares Outstanding / 1716.55 / 1786.44 / 1794.28 / 1856 / 1912.61
Net Sales Or Revenues / 48813 / 45041 / 42278 / 40893 / 38063
Cost Of Goods Sold / 26420 / 35591 / 33415 / 33112 / 31337
Gross Profit / 22393 / 9450 / 8863 / 7781 / 6726
Selling General And Admin Expense / 8705 / 214 / 100 / 55 / 270
Income Before Depreciation Depletion Amortization / 13688 / 9236 / 8763 / 7726 / 6456
Non Operating Income / 823 / 619 / 866 / 660 / 580
Interest Expense / -23 / 235 / 369 / 343 / 409
Pretax Income / 12246 / 9620 / 9260 / 8043 / 6627
Provisionfor Income Taxes / 4242 / 2984 / 3087 / 2785 / 2314
Minority Interest / 503 / 500 / 491 / 451 / 350
Income Before Extraordinaries And Disc Operations / 8004 / 6636 / 6173 / 5258 / 4313
Net Income / 7501 / 6136 / 5682 / 4807 / 3963
Disney’s Balance sheet
In millions / 2014 / 2013 / 2012 / 2011 / 2010Shares Outstanding / 1,716.55 / 1,786.44 / 1,794.28 / 1,856.00 / 1,912.61
Cash / 3,421.00 / 3,931.00 / 3,387.00 / 3,185.00 / 2,722.00
Receivables / 7,822.00 / 6,967.00 / 6,540.00 / 6,182.00 / 5,784.00
Inventory / 1,574.00 / 1,487.00 / 1,537.00 / 1,595.00 / 1,442.00
Other Current Assets / 2,359.00 / 1,724.00 / 2,245.00 / 2,795.00 / 2,277.00
Total Current Assets / 15,176.00 / 14,109.00 / 13,709.00 / 13,757.00 / 12,225.00
Property Plant And Equipment / 42,263.00 / 41,192.00 / 38,582.00 / 35,515.00 / 32,875.00
Accumulated Depreciation / 23,722.00 / 22,459.00 / 20,687.00 / 19,572.00 / 18,373.00
Net Property Plant And Equipment / 23,332.00 / 22,380.00 / 21,512.00 / 19,695.00 / 17,806.00
Investment And Advances / 2,696.00 / 2,849.00 / 2,723.00 / 2,435.00 / 2,513.00
Deferred Charges / 5,325.00 / 4,783.00 / 4,541.00 / 4,357.00 / 4,773.00
Intangibles / 35,315.00 / 34,694.00 / 30,125.00 / 29,266.00 / 29,181.00
Deposits And Other Assets / 2,342.00 / 2,426.00 / 2,288.00 / 2,614.00 / 2,708.00
Total Assets / 84,186.00 / 81,241.00 / 74,898.00 / 72,124.00 / 69,206.00
Accounts Payable / 7,595.00 / 6,803.00 / 6,393.00 / 6,362.00 / 6,109.00
Current Portion Of Long Term Debt / 2,164.00 / 1,512.00 / 3,614.00 / 3,055.00 / 2,350.00
Other Current Liabilities / 3,533.00 / 3,389.00 / 2,806.00 / 2,671.00 / 2,541.00
Total Current Liabilities / 13,292.00 / 11,704.00 / 12,813.00 / 12,088.00 / 11,000.00
Deferred Charges Taxes Income / 4,098.00 / 4,050.00 / 2,251.00 / 2,866.00 / 2,630.00
Long Term Debt / 12,676.00 / 12,776.00 / 10,697.00 / 10,922.00 / 10,130.00
Other Long Term Liabilities / 5,942.00 / 4,561.00 / 7,179.00 / 6,795.00 / 6,104.00
Total Liabilities / 36,008.00 / 33,091.00 / 32,940.00 / 32,671.00 / 29,864.00
Common Stock Net / 34,301.00 / 33,440.00 / 31,731.00 / 30,296.00 / 28,736.00
Retained Earnings / 53,734.00 / 47,758.00 / 42,965.00 / 38,375.00 / 34,327.00
Treasury Stock / 41,109.00 / 34,582.00 / 31,671.00 / 28,656.00 / 23,663.00
Other Liabilities / 1,252.00 / 1,534.00 / (1,067.00) / (562.00) / (58.00)
Shareholders Equity / 48,178.00 / 48,150.00 / 41,958.00 / 39,453.00 / 39,342.00
Total Liabilities And Shareholders Equity / 84,186.00 / 81,241.00 / 74,898.00 / 72,124.00 / 69,206.00