Industry Analysis of the Walt Disney Corporation
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The Walt Disney Corporation is an international, multi-segmented mass media entertainment conglomerate that was founded in 1923, in Burbank, California and today has blossomed into a household name for previous, current, and future generations to come. When it comes to analyzing this company, there are several different segments of the company to take into consideration. Disney, the force of nature that it is, has their hands in the theme park resort and vacation industry; owning at least seven different vacation destination. They are active in studio entertainment where they produce and acquire various live action and animated motion pictures, stage plays and music recordings. Most of these produced under Walt Disney Pictures, Marvel, Touchstone, Lucasfilm and Pixar (Must-know guide to the Walt Disney Company's competitors). They are involved in the interactive media and consumer product segment where they license trade names, literary and visual property, and characters to worldwide retailers, manufacturers, game developers, and publishers. Brand merchandise is distributed through wholesale, retailers and online platforms. They publish books, games and comic books under their brand. They famously own and operate several cable programing businesses, network broadcast television channels, and radio businesses including Disney, Freeform, ESPN and ABC just to name a few. In addition, they have entered the on-demand streaming service industry with EPSN+ and will soon be adding Disney+ into their portfolio this week on November 12th (Must-know guide to the Walt Disney Company's competitors).
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When it comes to determining Disney’s top competition, it is difficult to identify other corporations that truly compare to the powerhouse status of Disney and all segments of mass media entertainment that they are involved in. When looking for a company that checks the closest number of boxes, Comcast Corporation would be Disney’s closest competition. Comcast was established quite a few decades later in Philadelphia, Pennsylvania in 1963. Comcast’s segments include broadcast television, most famously NBC, cable networks, cable communications, the film industry and the theme park industry with Universal Studios located in Orlando, Florida and Hollywood, California. (Must-know guide to the Walt Disney Company's competitors) Another perspective to consider when identifying Disney’s competition would be taking note of their main focus of growth and direction into 2019 with their streaming services. In March of 2019, Comcast and Disney went head to head in competition to acquire billions of dollars’ worth of 21st Century Fox assets, which included Hulu streaming services. In the end, Disney prevailed making them the largest media entertainment conglomerate worldwide. With Disney creating ESPN+, acquiring Hulu, and rolling out Disney+ they are increasing their direct to the consumer streaming market share, making them direct competitors with Netflix as well.
The mass media entertainment industry is a very competitive one and is constantly changing with the evolution of technology. Since the focus on video streaming has come to the forefront for companies like Disney, the trends of consumers cutting the cord on cable, advertisements becoming personalized per consumer and the attention to the privacy of this data are all industry shaping trends for 2019 (2019 Media & Entertainment Industry Outlook). As far as the future of the industry, the outlook is that revenues will continue to rise steadily, and by 2023 it is expected that digital revenues will account for up to 60% of total revenues in the entertainment and media industry (The future of media and entertainment: Tackling digital transformation through experimentation). Trends to look out for in the future are augmented reality being incorporated into this industry, and several mergers and acquisitions amongst competing companies because of the competitive landscape of needing to provide a larger library of content for consumers to stay relevant (The future of media and entertainment: Tackling digital transformation through experimentation). The industry is ever evolving and always relevant because once one form of “entertainment” is phased out of popularity, another one will take its place. Competition is fierce and the industry outlook is a very strong and safe one from an investment standpoint.
Liquidity (Quick) Ratio is calculated by dividing Current Assets by Current Liabilities. The lower that a company’s liquidity ratio is, the slower it the process for that company is to convert those assets into cash. Disney’s Quick Ratio is 0.94, compared to Comcast’s 0.79, which are both typically seen as less than ideal for a company. While low numbers do not always indicate a critical problem, one might assume from this ratio alone that Disney and Comcast (whom measures worse in this category) may have difficulty meeting their current obligations.
Activity Ratios measure how quickly the business can convert operating assets into cash or sales. These ratios, namely the Inventory Turnover Ratio which tells shows how many times the inventory has been sold out in one accounting period. Disney has a turnover of about 23.5 while Comcast has approximately a 15.4 turnover ratio. Disney has the higher turnover ratio, and what can be deducted from the formulas that it takes 15.5 days for Disney to sell their entire inventory, while Comcast would take 23.7 days to sell their inventory.
The Debt Ratio shown in the Excel document was calculated by dividing total liabilities by total assets. For Disney we see a Debt Ratio of 2.15; for Comcast we see a Debt Ratio of 1.41. The debt ratio shows a company’s ability to pay off its liabilities with its assets, measuring the effective financial leverage. The lower the Debt Ratio, the more stable the business is perceived. Comcast has the lower of the two Debt Ratios by 0.74.
Profitability Ratios determine the ability of a company to generate income against the expenses incurred. Gross Profit Margin Ratio is one of the profitability ratios that is calculated by deducting Cost of Goods Sold (COGS) from sales revenue and is then divided by the sales revenue. The higher that the Gross Profit Margin is, the better it is for a company because it means that a company can make reasonable profit on sales. Disney’s ratio is 44.94% which is higher therefore seen as better than Comcast’s ratio in this category of 38.86%.
Market Ratios are used to evaluate the share price of a company’s stock. The most common is the Price/Earnings (PE) ratio. The PE ratio is calculated by the market price of a share, divided by earnings per share. The higher the PE Ratio, the more favorable it is seen for investors because they expect higher earnings, however, undervalued stock may have a low PE ratio. Disney holds a 12.97 PE Ratio, compared to Comcast’s PE Ratio of 13.46.
Below is an Excel Spreadsheet that has the financial information comparing Disney and Comcast. The final five rows show the five categories of financial ratios and highlighted in green are the ratios that would be more favorable to investors.
The main things to consider when buy any stock are:
- Company History/Mission: What does this company do? How do they make their money? What is their vision? How stable is their general management? Are they always looking to innovate?
- Competitor/Comparator Analysis: Where does this company fall in the industry? Is it leading the pack or least a strong competitor?
- Understanding their price/earnings ratio: What is the current price and how does it compare to the earnings (both per share)?
- Stability: What has the general fluctuation in the stock in the past 5 years? Has the company proven to be successful in the past? What has the net gain in income been in the recent past?
- Dividends: Does this company pay dividends? Are they generally regular?
Let’s example these factors and explain why we believe buying Disney stock would be a smart investment right now.
- Company History/Mission
This has been a leading and lasting brand for almost the last 100 years. It is a diverse multinational mass media and entertainment company. Its current CEO has been in his position since 2005 and doesn’t plan on leaving his position until his contract ends in 2021 leaving ample time to find a suitable replacement which is notably already underway. This company has procured billions of fans through their many different segments (film, TV, theme parks, cruise line, merchandise, virtual games, etc). and they are never disappointed. They are always left anxiously awaiting to see what they’ll do next. Disney has announced widening their reach on the small screen with their launch of Disney+. While they already own, the Disney Channel, ESPN, National Geographic, ABC, Freeform and many more this new streaming service will continue to grow their market share as they already have a majority stake in Hulu. This long-standing company is constantly looking for avenues of growth and ways to innovate. Buying now would be a wise investment because we’re forecasting long-terms growth here.
- Competitor/Comparator Analysis
Disney competes in many markets, of which, they always seem to be leading the pack or have significant market share. Disney now owns Walt Disney Pictures, Disney Animation, Pixar, Marvel Entertainment, Luscafilm, I think it’s safe to say they house the most famous and beloved franchises of all time. They will be continuing their market growth into the streaming segment with their share of Hulu and launch of Disney+. They compete in the sports market with their acquired channel ESPN. Disney competes with Six Flags and Universal Studios in the theme park arena. Universal had to increase their sales so added Harry Potter world which has boosted numbers, but Disney still remains the iconic place every parent dreams of taking their child.
- Understanding their P/E Ratio
Since 2010, the P/E ratio has never dipped below 10%:
While every decision by a company may not be perfect or extremely profitable, but due to all of the different segments Disney operations in, we have seen continuous growth for almost the last 10 years. Operating margin has continued to improve from 18.5% in 2009 to 26.4% in 2018 (Motley Fool). This is largely credited to the theme park success as well as the release of the Marvel and Star Wars universe franchise releases.
Semi-annually Disney has reportedly provided between $.66 - $.88 in dividends. This provides an average of a 1.4% dividend yield over the last 9 halves.
In summation, I think we have accurately reported that Disney is comprised of demonstrating the following: competitive advantages, growth opportunities and financial strength. Since a potential investor can successfully account of each of these aspects in the company, we suggest not only purchasing the stock but holding on to it.
- Seth, S. (2019, November 2). The World's Top Ten Media Companies. Retrieved November 10, 2019, from https://www.investopedia.com/stock-analysis/021815/worlds-top-ten-media-companies-dis-cmcsa-fox.aspx.
- Westcott, K., & US Telecom. (2019, February 26). 2019 Media & Entertainment Industry Outlook. Retrieved November 10, 2019, from https://www2.deloitte.com/us/en/pages/technology-media-and-telecommunications/articles/media-and-entertainment-industry-outlook-trends.html.
- Wahid, N. (2019, June 24). The future of media and entertainment: Tackling digital transformation through experimentation - WiderFunnel Blog. Retrieved November 10, 2019, from https://www.widerfunnel.com/future-of-media-and-entertainment/.
- Must-know guide to the Walt Disney Company's competitors. (2014, January 10). Retrieved November 10, 2019, from https://finance.yahoo.com/news/must-know-guide-walt-disney-210005557.html
- Comcast Reports 4th Quarter and Full Year 2018 Results. (2019, January 23). Retrieved November 10, 2019, from https://www.cmcsa.com/news-releases/news-release-details/comcast-reports-4th-quarter-and-full-year-2018-results.
- Walt Disney Co. (2019, November 10). Retrieved November 10, 2019, from https://money.cnn.com/quote/profile/profile.html?symb=DI.
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