Stock of the Day - January 28, 2009 - DIS

Walt Disney Company (DIS)

Walt Disney has been a household name for over 75 years. Disney’s movies, characters, and products have a place in every young person’s heart. The years have seen one man’s dream turn from short animated films to an internationally recognized company. The Walt Disney Company (DIS) is an incredibly diverse company with branches that span multiple sectors. The best way to analyze the company is to go through each one of these branches.

Disney’s parks and resorts are a hefty portion of the companies business, as they provide about 30% of the companies revenue. There are five resort locations that make for a total of 11 theme parks, including the famous Disneyland Resort in California and Walt Disney World Resort in Florida. Disney also has its own Disney Cruise Line and international Vacation Club. Disney increased its operating income from parks and resorts in 2008, but at a slower rate than it had been increasing in prior years. We have to ask ourselves if we believe that parks and resorts can continue their success in the harsh economic times that we’re living in, as people are cutting back on spending and vacations. Disney recently offered buyouts on the positions of 600 executives in this branch of their business. This attempt to cut spending may signal reduced forecasts for income in 2009. I simply do not believe that the resorts and parks of Disney will help the company this year.

Disney’s biggest source of income comes from its media networks. Of course, Disney owns the multiple Disney channels on TV, but it also own ABC and ESPN. These guys have consistently netted Disney solid amounts of cash for less invested capital over the years. Operating income received from the media networks amounted to about 56% of Disney’s total income for 2008.  Disney channel, ABC, and ESPN are all nationally televised. Disney’s media networks should continue to succeed and bring in good money in 2009, and this is very significant when you consider that this branch is a large part of the company.

Disney will forever be famous for instilling magic into the lives of children and adults alike in the form of its movies. Studio entertainment accounted for about 19% of Disney’s revenue for 2008. Blockbusters like Wall-E and High School Musical proved that the entertainment giant can still captivate any audience. Despite the success, entertainment in the form of movies is hardly recession proof. Viewers will come to the big screen much less, and DVD sales will definitely drop in the near future.

Finally, Disney has proven itself time and time again to be a force in merchandising. No one else sells to children better. But, sales of consumer products are the company’s smallest source of income: Consumer products provided only 8.5% of Disney’s income in 2008. The sale of their products will not boom in 2009, but there will still be a demand for the toys, clothing, and countless other desirables that Disney makes.

The company was trading at around $32 before the disaster that hit us in late 2008 and was last traded at $22.28. Is there merit behind the $10 drop in price? If we look at this strictly based on the numbers, the $10 is about a one-third decrease in stock price. Has Disney lost one-third of its value as a company? Lets look at my branch analysis: Parks and Resorts will be down (22% of ’08 income), Media Networks will continue to succeed (56% of ‘08 income), Studio Entertainment will be weaker (13% of ’08 income), and finally merchandising may slightly drop (8.5% of ’08 income).  If I were forced to put a range on the decrease in the company's actual value, I would roughly estimate somewhere between 20 and 30 percent. So it looks like Wall Street slightly oversold DIS.

Disney is an entertainment titan that will be around for a long time to come. I would add the company onto a growing list of blue chip stocks that are currently undervalued but will continue to succeed in the long run. While the short run is murky and unsure, DIS will eventually reach its mid-$30 levels again. There are many companies that will rebound much faster and steeper than Disney when the markets turn around, but on its merits alone I would rate Walt Disney Company a very conservative buy.

 

-Matt Schwartz

College Trillionaire