The Walt Disney Co.

FINA 4200.002

Nick Camp
Nick Meyer
Muddasir Sultan

Theme:
The Walt Disney Co. is an enigma in these rough economic times for the sole purpose
that they show minimal signs of slowing down. Mickey Mouse has his hands dipped into
everything and from an investors standpoint thats a good thing because that equals
diversification, and in turn, diversification lowers risk. The Disney Company operates in several
areas of the media and entertainment industry. They have recently acquired Pixar, which
consistently provides box office record sales with their animated films. Along media
entertainment lines, Disney also operates dominant media channels ABC and ESPN. These are
two channels that carry with them a strong loyal following. Sports have always been Americas
past time and its unlikely to see them ever declining or the viewership that goes along with it.
People have always poured capital into sports and will continue to for many centuries to come.
Aside from Disneys ventures, investors focus and confidence should be in the trademark
of Disney. Characters such as Mickey Mouse and Buzz Light-year are icons that will never be
lost in the pages of time. Kids and adults alike will always want to participate in the next big
thing the company has to offer and these kinds of expectations will always lead to Disney having
a stable stock price and even unstable in the positive manner because the growth potential is
limitless for this company. You can see that limitless with the many franchises Disney has under
its wing. For example, the company has a pretty expansive retail line whether it is Pirates of the
Caribbean or High School Musical or any of the other hundreds of brands they own and they
only receive 6% of overall revenue from their retail lines, but that 6% is the equivalence to $30
billion according to Standard & Poors corporate overview of the company.
Branding is the reason why Disney is so successful. They really target their audience
from a young age and that awareness from their market does not dissipate. This was best stated

by an article on Bnet: With brand awareness from such young consumers, it's no wonder Disney
Corp. executives are singing Hakuna Matata, Means no Worries all the way to the bank. The
Company is also opening up theme parks and resorts all over the world. In an economic
downturn, you would expect them to hold back but Disney just keeps on expanding and people
keep on attending. In an article by Wall Street Journal on July 31st this year, the analysts had
stated that the company beat forecasters expectations and the company maintained strong
attendance along with increased park revenue by 5% to $3.04 billion. So you see, all of these
segmented parts to the company come together as one and provide Disney with the economic
stability it needs to function and prosper and in turn it reflects upon their stock price and their
ability to reward their shareholders.

Business Analysis
Company Profile
The Walt Disney Co. is the worlds most dominant and well-known entertainment
company. Mickey Mouses white gloved hands are dipped in everything from the film industry,
domestic and international theme parks, television, and cruise ships to retail shops bursting with
Disney toys and memorabilia. The Walt Disney Co. has established a dynasty in entertainment
that is so well diversified that a child could be watching the Disney channel in one room, while
his mother is watching Lifetime cooking dinner, and his father is kicking back after a tough day
at work watching sports recaps on ESPN while planning a getaway for his family to Disney
World in Orlando, FL. Not to mention that after dinner, the family will most likely meet in the
living room to watch ABCs prime time lineup.

The Walt Disney Co. operates in several areas of the media and entertainment industry.
Disney produces studio entertainment from companies such as Pixar, Touchstone, Miramax, and
Walt Disney that continually hits the market with numerous successes from Toy Story to Pirates
of the Caribbean. Disneys television companies include ABC, Lifetime, Disney Channel, The
History Channel and ESPN. As far as theme parks, what Disney is perhaps most well known for,
they operate Walt Disney World Resort in Florida, Disneyland Resort in California, Tokyo
Disney Resort, Disneyland Resort Paris, and Hong Kong Disneyland Resort. Disney also boasts
the Disney Cruise Line, ESPN Zone, Disney Vacation Club, and even claims a Disney Virtual
Magic Kingdom website (vmk.com). In addition to all of these major lines of entertainment,
Disney also profits from consumer products such as toys and childrens books sold in its World
of Disney Stores and many other retailers.

Macroeconomic and Industry Analysis

Standard & Poors currently rates the sub-industry of movies and entertainment as
neutral, citing that the market is saturated with physical distribution of DVDs and CDs currently.
However, they state that companies that find ways to reinvent their distribution strategies in
order to take advantage of these new distribution formats such as iPod and video-on-demand
services will boost their revenues in the near future. As will be discussed in the next section of
this report, Disney is doing just that with both their internet and iPod projects.
A Wall Street Journal Article on July 31st this year cited Disney beating forecasters
expectations for the company in the wake of an apparent economic downturn. The article states
that even with high gas and airfare prices mixed with housing industry problems, Disney Parks
still maintained strong attendance along with increased park revenue by 5% to $3.04 billion.

Disney also reported strong performance from its media companies. These two strong
performing assets helped to offset poor production from a perceived blooper in the poor
performance of The Chronicles of Narnia: Prince Caspian movie. This is great proof of the
effectiveness of Disneys product diversification across different sectors that they compete in.
(WSJ Disneys Theme Parks Help Net Rise 9%)
Even as recently as October 6th of this year, a Wall Street Journal article has come out and
more or less stated that Disneys stock value in the market is highly resilient to the major
financial crisis and economic downturn currently going on. The article, entitled Disneys Magic
Is Starting to Wear Thin, is basically an attempt to force Disney shareholders to abandon their
stock. The following is a quote from that article:

While rivals CBS Corp., Viacom Inc., Time Warner Inc. and News Corp. (parent of The
Wall Street Journal) have lost 25%-50% of their value since January, Disney is down a
gentle 7%. The stock is trading at roughly 12 times fiscal 2009 earnings, while most of
its peers are trading between about seven and nine.

The main reason given for Disney being more resilient: less exposure to advertising than its
rivals. This is a great example of Disneys management team doing a great job of minimizing
risk by diversifying and how they keep the business less exposed to economic downturns. The
author of the article goes on to say that Disney deserves to trade at a premium, but questions the
justice of the premium currently being won by Disney and its strong management team which
have obviously impressed investors and customers of its products alike.

Company Analysis and Major Product Prospects

According to Standard & Poors corporate
overview of The Walt Disney Co., theme parks
and resort compromised about 30% of fiscal
year 2007 revenues, while media networks
compromised 42% of revenues, studio entertainment
compromised 21% of revenues, and lastly consumer
products were about 6% of revenues.
As to the recent performance of each of these sectors, Hoovers company overview of
Disney says:

Disney has been on an upswing with most of its businesses hitting on all cylinders the
past few years. Its filmed entertainment units have been riding high on a string of box
office successes and its theme parks continue to draw millions of visitors each year.

Disney Parks have seen rising attendance due in part to new attractions based on films Finding
Nemo and Toy Story. (Hoovers) Disney is also doing much to increase attendance at its
California Adventure park near Disneyland with a $1 billion renovation project. (Hoovers)
Much could be said for the prospects of Disneys studio entertainment prospects with the
recent addition of Pixar to its marketing mix of movies and consumer products. Pixars more
modern and technologically advanced animation shot its image to the top of the consumers
minds in the past several years, and perhaps since its first big movie, Toy Story. Now, mixing the
success of Pixar with a powerhouse like Disney, the two are destined to do many great things in

the future (and Pixars current trophy case of 21 Academy Awards, three Golden Globes, and one
Grammy boast that they already have). (Wikipedia Pixar) According to First Showing.net,
Disney/Pixar released a list of the expected films through 2012. The list included (in order of
release date) Wall-E (Disney/Pixar), Bolt (Disney), Up (Disney/Pixar), Toy Story 3-D (Pixar),
The Princess and the Frog (Disney), Toy Story 2 3-D (Pixar), Toy Story 3 3-D (Pixar), Rapunzel
(Disney), Newt (Disney/Pixar), The Bear and the Box (Disney/Pixar), Cars 2 (Disney/Pixar), and
King of the Elves (Disney).

As discussed previously in the macroeconomic and industry analysis, one of Disneys

major strategies to keep moving forward is to find new ways to offer its content to users who are
now more digital by getting in to the broadband and wireless world. Disney is doing this in
many ways, starting with offering a wide variety of ABC shows on Apple iPods, and beefing up
its internet operations. (S&P) ABC viewers now have the option to view full episodes of the
newest shows directly on the ABC website with limited (more limited than regular television)
commercial interruption. Not only that, but the shows are offered in HD as well. Along the
same lines, Disney recently re-launched its flagship website in 2007 as a destination for kids to
play games, watch videos, and use new social networking features such as the recently acquired
Club Penguin (a $350 million dollar investment). (Hoovers)

Financial Analysis
2012

2011

35,710

33,463

5%
31,357

35,510

2006

5%
28,729

33,747

2005
31,374

2004

7,746
7,259
6,802
6,374
5,973
6,781
5,355
3,931
4,048
2
16%
16%
16%
16%
16%
19%
16%
13%
13%

38,108

7%

37,330

2007

Gross Profit
Gross Margin
Operating
Income
Operating
Margin
Net Income

40,667

7%

39,837

2008

48,413

7%

42,512

2009

Total Revenue
Percent Change
in Revenue
Cost of Revenue,
Total

7%

45,366

2010

8%
28,392

2%
27,443

30,752

14%
26,704

10,651

9,981

9,353

8,764

8,213

7,725

5,324

3,811

3,739

22%
$4,648

22%
$4,355

22%
$4,081

22%
$3,824

22%
$3,584

22%
$4,687

16%
$3,374

12%
$2,533

12%
$2,345

* Future Revenue was predicted assuming a yearly growth average of 7%.

* Future Cost of Revenue was predicted assuming the average cost of revenue in the past being about 84% of tot
revenue
* Future Gross Profit was predicted by subtracting predicted future Revenues from future Cost of Revenue
* Future Operating Income was predicted assuming that Disney maintains an Operating Margin of 22%
* Future Net Income was predicted as 60% of Gross Profit for the year, following the average of the past 5 years.

Growth
Walt Disneys domestic and global focus gives the company numerous ways to increase
revenue and broaden their financial flexibility. They accomplish this through a very solid balance
sheet consisting of very solid ratios.
As I mentioned before, the balance sheet of Disney appears to be rock solid. Having
looked at their revenues for the previous 5 years Im not surprised at all why they have so much
8

financial flexibility today. Disney is a company consisting of four segmented parts: Media
Networks, Parks and Resorts, Studio Entertainment and Consumer Products. Most notably
though, would have to be the Media Networks segment. The amount of total revenues they bring
in far exceed any of the other segments at 43%, according to Standard & Poors corporate
overview of the Walt Disney Co. I mention this because Disney has a competitive advantage over
their competitors as far as growth potential is concerned with its networks. According to
Disneys Third Quarter Report, Media networks revenues for the third quarter increased 8% to
$4.1 Billion and segment operating income increased 9% to $1.5 Billion. The company really
excelled in the third quarter in their cable networks department as well. Operating income
increased by 14% to $1.2 Billion, primarily due to exponential growth at ESPN and for the
companys cable equity investments. The sports industry has caused much revenue gain and
growth for Disney especially since the inauguration of the NFL season. The growth seen at
ESPN was for the most part due to higher affiliate and advertising revenue which was in turn due
to contractual rate increases, subscriber growth, and increased recognition of previously deferred
revenue related to annual programming commitments according to Disneys Third Quarter
Earnings Report. This type of success isnt just limited to the Media Networks, but is also seen in
Disneys Parks and Resorts as well.
Disneys Parks and Resorts comprise the second largest portion of their total revenue and
in the third quarter report, Parks and Resorts revenues increased 5% to $3.8 Billion and segment
operating income increased 3% to $641 million. The increase in revenue was primarily due to an
increase at Disneyland Resorts driven by favorable currency translation and higher guest
spending and attendance according to Disneys third quarter report. There couldnt be a better
signal for investors to delve into a company as what Disney is showing. In an economic

downturn, people are still finding it in their budget to plan a vacation and visit all that Disney has
to offer. The other reason to invest into Disney is the loyalty factor and the amount of loyalty
people bestow upon the company. Trademark characters such as Mickey Mouse and Peter Pan
are icons that will never disappear. They have survived all these years and you bet your bottom
dollar we will live to see our grandchildren enjoy the same magic as we once did.
The potential of Disney is not limited to these two platforms, and investors should pay
close attention to the estimated rise in sales due to Merchandising and Consumer products. The
retail market has been on a slump lately; however, Disney has and is showing resilience to that
notion with their current and projected sales. Retail sales of licensed Disney merchandise by
Disney and its licensees are currently on track to exceed $30 Billion in global retail sales in fiscal
2008 (FY08), a record for Disney products, which in 2007 more than doubled retail sales from
$13 billion to $27 billion in just five years; as was announced by Disney chairman Andy Mooney
at the International Licensing Expo in New York City on June 10, 2008. We expect the trend to
continue and in 2012 expected retail sales should be around $48 billion. An explanation as to the
growth of their retail industry is best stated by Mr. Andy Mooney:
It's the Disney difference that accounts for this unprecedented growth fueled by
unmatched content and rich franchises nurtured across The Walt Disney Company. In just
five years, retail sales of Disney products have doubled and we have diversified our
portfolio of brands with smash hits like High School Musical, evergreens like Disney
Princess and expanding franchises in Disney-Pixar's Cars and Disney Fairies. Our
product offerings now reach all ages. Simply put, there is no better time to be aligned
with Disney."

10

In addition to this statement, we believe the companys retail stores will continue to expose new
consumers to its product portfolio, particularly in international markets which will further lead to
a consolidated revenue increase of 6.8% in Fiscal Year 08, according to the financial info
provided by yahoo finance.
Profitability
Disneys profitability is very resilient to the conditions of the market and in fact they are
unwavering and even on the verge of rising in some areas due to their innovative products and
ideas. We first take a look at the companys operating margin which is just a measure of how
much a company makes on each dollar of sales before interest and taxes. (Investopedia) We do
predict that there will be some margin expansion in Fiscal Year 08, which would be due to
condensed costs at the amusement parks and resorts as well as unrelenting strong double-digit
growth in internet revenues which would likely reach $1 billion by Fiscal Year of 09, according
to the financial information provided in Disneys annual report. Disneys Margin might become a
bit skewed due to elevated programming costs and their investments in pioneering media and
games development which will initially lower the margin but will surely see it elevate again from
the amount of revenue it would produce in the near future. Based on that expansion, we project
the companys operating margins will average 29% over the next five years with the information
provided to us by Yahoo finance. Also, compared to its competitors, Disney boasts better annual
and quarterly figures which in turn mean they are earning more per dollar of sales. Operating
margin is a good indicator of the type of quality of the company but another ratio to further
solidify that notion would be the Gross Margin.
Gross Margin basically represents the percent of total sales revenue that the company
retains after incurring the direct costs associated with producing the goods and services sold by a

11

company. (Investopedia) For the fiscal year 08, Disney has a Gross Margin of 20.15% and to
some investors this may be a red flag when comparing to fellow competitors Time Warner and
CBS, but in reality the reason their margin are so low is because they are divulged into many
more endeavors than are Time Warner and CBS, and because of that they dont necessarily retain
as much but thats not a bad thing. That just points to the fact that Disney has many more
obligations to deal with and fulfill and the numbers will look skewed, but thats the process they
have to go through to make sure their everyday operations are running smoothly. The last two
ratios we looked at are viable options when looking at how much revenue the company retains
after factoring out its variable costs, but in the case of the Profit margin, its usefulness varies.
The Profit Margin basically measures how much out of every dollar of sales a company
actually keeps in earnings. (Investopedia) The other usefulness of profit margins is that they are
mainly used to compare companies in similar industries to test and see who outperforms who. In
our case, we projected Disney to hit 12.17% (based on the information provided by Google
finance) by the end of the fiscal year and when its measured up against its competitors, Disney
slightly outperforms them in this area and this is a good indicator as to why they are able to flex
their financial muscles. Also, this is good news for investors because it lets you know that the
company can keep their costs in control and the more the company gets to retain, the more likely
it is that they will pay out generous dividends at the end of the fiscal year. Both the Profit margin
and the Gross margin are excellent indicators of a companys profitability, but the one ratio that
should stand out to investors would be the EPS ratio.
The Earnings per Share ratio measures the portion of a companys profit allocated to each
outstanding share of common stock and in retrospect the overall profitability of the company.
(Investopedia) In Disneys case, we expect the fourth quarters EPS to be $0.502 and for the

12

fiscal year ending, we forecast EPS to be $2.32 based on the information supplied to us by
Google finance. When comparing Disney to its competitors, no one even comes close. They
outperform both CBS and TWX and even outperform the Industry and you can thank that
increase in EPS due to the sustained share buybacks that Disney is constantly engaged in. Using
the growth rate model on the following page we were able to predict that Disneys Growth rate
for the next 5 years would be 14%.

Year
EPS
2003
0.59
2004
1.08
2005
1.21
2006
1.65
2007
2.33
% Change
slope
y-int.

0.405
810.653

2008
2009
2010
2011
2012
% Growth
years

2.32

21.293
1
13.036
86
11.533
28
10.340
66

2.814
3.18085
71
3.54771
43
3.91457
14
-100
rate over next 5

14%

Stock Valuation
Fair Value: A rational and unbiased estimate of the potential market price of a good,
service, or asset.
The Financial Accounting Standards Board (FASB) issued Statement 157 in
September 2006 to provide guidance about how entities should determine fair value
estimations for financial reporting purposes.

13

Statement 157 defines fair value as the price that would be received to sell and
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement data. This is sometimes referred to as exit value.
S&Ps Fair Value Calculation: The price at which a stock should trade at, according to
S&Ps proprietary quantitative model that incorporates both actual and estimated
variables. Relying heavily on a companys actual return on equity, this model
places a value on a security based on placing a formula-derived price-to-book
multiple on a companys consensus earnings per share estimate.
S&P Fair Value: $22.60
As of now, analysis of the stock's current worth, based on S&P's proprietary
quantitative model suggests that Disney is overvalued by $2.15 or 8.7%. When we
started this analysis the stock was undervalued by $5.06 or 22%. Although Disney is
a stable and diversified corporation it is feeling the pressures of the declining
economy.

P/E Ratio = Price/EPS = 24.75/2.32 = 10.7

-This is the price you pay for $1 of

the companys earnings or shareholders equity.

Disney: Stock Price: $24.75
S&Ps DIS stock report

Earnings Per Share: $2.32 -Data received from

Compared to competitors:

Competitors names received from www.hoovers.com, Data received from S&P stock
reports

14

Disney is faring well against its competitors in price to earnings multiples. Higher
P/E suggests investors expect higher earnings growth in the future, a vote of
confidence from the market.

Dividend Discount Model:

Vo = Dt + Po/ 1+k
- page 405 chapter 13.3 Essentials of Investments 7 th
edition by: Bodie, Kane, and
Marcus
Where:
Vo = Value of stock
Dt = Dividend payment at t time
k = required return or discount given by CAPM (Capital Asset Pricing Model)
CAPM = ra = rf + a(rm rf)

-found through Investopedia website

Where:
rf = Risk free rate
a = Beta of the security
rm = Expected market return
Calculations:
The interest rate on a three-month U.S. Treasury bill is often used as the risk-free
rate. Investopedia
rf = 0.83 Data found at http://www.ustreas.gov/offices/domesticfinance/debt- management/interest-rate/yield.shtml
a = 0.91

-as listed by S&P stock report for Disney

rm = E(r) = p(s) r(s) = 11.6%

chapter 5.2 Essentials of

-Formula received from page 121

Investments 7 th edition by: Bodie,

Kane, and Marcus

-Calculated below:
Year
2003

Stock
Probabilit Stock Return *
Return
y
Probability
0.443 0.1666666
0.073833333

15

2004

0.202

2005

-0.128

2006

0.443

2007

-0.03

2008

-0.233

67
0.1666666
67
0.1666666
67
0.1666666
67
0.1666666
67
0.1666666
67
SUM:

0.033666667
-0.021333333
0.073833333
-0.005
-0.038833333
0.116166667

Expected Rate of Return: 11.6%

Data received from http://quicktake.morningstar.com/StockNet/StockReturns.aspx?
Country=USA&Symbol=DIS
k = CAPM = 0.83 + 0.91(11.6 0.83) = 10.6%
Dividend = $0.35

-Data received from S&P stock

report

Fair Value:

Vo = 0.35 + 24.75/(1+0.106) = $22.69

Free cash flow model:

-Chapter 13.5 page 427 Essentials of

th

Investments 7 edition by: Bodie,

Kane, and Marcus
For this model you need to start with finding the companys free cash flow to the
firm (FCFF):
FCFF = EBIT(1 tc) + Depreciation Capital Expenditures increase in
NWC
Where:
EBIT = earnings before interest and taxes
tc = corporate tax rate
NWC = net working capital = Current Assets Current Liabilities
Increase in net working capital:

16

Increases in
Net Working
Capital
Current
Current Assets Liabilities
2006
9562000
10210000
2007
11314000
11391000

-648000
-77000
571000

FCFF = 8,471,000,000(1 - .372) + 1,491,000,000 1,566,000,000 571,000,000 =

4,673,788,000
The next step in this model is to find the free cash flow to equity holders (FCFE)
FCFE = FCFF interest expense(1 tc) + increases in net debt
Net Debt = short term debt + long term debt cash and cash
equivalents
Net debt `07 = 0 + 12,166,000,000 3,670,000,000 = 8,496,000,000
Net Debt `08 = 0 + 11,522,000,000 2,589,000,000 = 8,933,000,000
Difference between `07 and `08 Net Debt for increase amount =
8,933,000,000 - 8,496,000,000 =437,000,000
FCFE = 4,673,788,000 746,000,000(1 - .372) + 437,000,000 = 4,205,737,000
Market Value of equity: FCFE/(1+ke)^t + Pt/(1+ke)^t
Pt = terminal value = FCFE/(Cost of Capital g)
Pt = 4,642,000,000/.0539 = 86,122,448,979.59
Year

Divide
nd

1998
1999
2000
2001
2002
2003
2004

0.19
0.21
0.21
0.21
0.21
0.21
0.21

2005
2006
2007

0.21
0.24
0.27

% growth
10.52631
579
0
0
0
0
0
0
14.28571
429
12.5
14.81481

17

481
2008
0.31
Average dividend growth
5.21
rate(g) =
%
Market Value of Equity:
4,205,737,000/(1 + .106) + 86,122,448,979.59/(1+.106) = $81,671,054,231.10
Estimated Free Cash Flow Fair Value = $81,671,054,231.10/1,876,400,000
shares = $43.53
This model favors Disney for its high amount of current assets and their large free
cash flow numbers. This price would be a more reasonable price if the market
hadnt recently suffered such a great loss, and is still an attainable goal.

Bulls vs. Bears

When we say that it is a bull or bear stock market we are talking about the driving force
behind the market. The bulls are the buyers so that would make the sellers the bears. When we
use the term bull or bear we could also be talking about specific securities and sectors.
A bull market is a market that is associated with investor confidence. As a result of this increase
in confidence investors are more likely to buy in anticipation of making a capital gain. The most
memorable and longest running bull market was seen in the 1990s. This was the time when the
U.S. and other global markets saw their fastest growth spurt ever.
In a bear market, the opposite would be true. Investors will be more pessimistic about
buying and are more inclined to sell their stocks to cut their losses. A bear stock market does not
come about from a small decline, but a considerable drop in prices over a prolonged period of
time. From 1930 to 1932 was probably the most infamous bear market in history. This bear
market was the beginning of the Great Depression. There was a much less severe bear market

18

from 1967 - 1983, which included the energy crises of the 1970s and the unemployment surge in
the 1980s.
It is most commonly accepted that in order for the stock market it to be considered a bear
market there has to be a price fall of at least 20% in a key stock market index from a recent peak
that happens over at least two months. As of now, the technical indicators for Disney have been
Bearish. Its a bearish market right now though with so many stock prices dropping. (EZine
Articles)
Bull view of Disney:
A good reason to be bullish with Disney stock in this time of economic crisis is the fact
that the biggest portion of their income and revenue is their media networks. TV and radio are a
cheap form of entertainment that a lot of people might choose rather than going out to spend
money. DVD sales will also be a cheaper form of entertainment for people trying to save money.
Bear view of Disney:
The parks and cruise lines of Disney will probably suffer from the declining economy as
well as movie theater and products. S&P reports Disney as a bearish market right now. With the
economy crisis a lot of stocks have been on a steady decline for a long period of time which will
put them into a bearish market.

Risk
If anything is unnerving in deciding whether or not to invest in The Walt Disney Co.,
those feelings will quickly fade away when considering the secured competitive advantage which
Disney may very well have written the textbook on. Looking back as far as an 8K report filed
with the SEC in October, 2002, one can see the clear emphasis that then CEO Michael Eisner

19

placed on Disneys competitive advantage. In the report, Eisner states the undeniable power and
strength of the Disney and ESPN brands.
Eisner, who rightly stated the necessity of a brand being unique and relevant, went on to
emphasize ESPNs growing stake in the sports broadcasting market at the time. Disney has a
monopoly of the heart, and ESPN embodies the edgy and irreverent excitement of sports, said
Eisner in 2002.
Fast forward to Disneys 2007 10K report and you find the very same emphasis under
new CEO Rober Iger. The annual report notes that the source of the Disney brands competitive
advantage is their creative engines. In fact, Disney has even coined a creative name for their
competitive advantage, the Disney Difference. (Disney 10K 2007 p6)
We call this value creation dynamic the Disney Difference. To make the most of our
creative content, our portfolio of Disney businesses combine to create a highly effective
marketing engine that helps increase revenue while affording numerous efficiencies.
(Disney 10K Report, 2007 p6)
The report goes on to discuss that simply by stamping the Disney name on a product, it breaks
down numerous barriers into any market, whether geographic markets (theme parks) or
technology platforms. The Disney brand does so, while increasing the value-generating
lifespan of that product. (Disney 10K Report 2007 p6).
The same 2007 10K Report goes on to cite the secured competitive advantages provided
by Disney and ESPN in its strong portfolio of brands. Disney cites current properties such as
Disney Princesses, Cars, Toy Story, Pirates of the Caribbean, High School Musical, Hannah
Montana, Winnie the Pooh, and who could forget, Mickey Mouse, as current and enduring
sources of revenue for the company. (Disney 10K Report 2007 p10)

20

Its hard to imagine a company that has a better brand image, or especially one that is
located so close to the hearts of millions, if not billions, of people alive today. When discussing
the risk associated with Disney, the strongest risk one could cite would be that of economic
downturns, during which Disney, as previously discussed in the Business Analysis, has managed
to minimize their damage with an ever increasingly diverse portfolio.
When considering Warren Buffets famously coined term economic moat, former
Disney CEO Michael Eisner stated in the 2002 8K previously discussed that the uniqueness and
relevance of Disney and ESPN have created a protective moat around the assets contrived under
the two brands. He goes on to say, perhaps jokingly, but true never the less, that in the case of
the Disneyland Resort and Walt Disney World, the moat is literal as well as figurative. (8K
Report 2002)

Investment Strategy
With the current economic condition investors must be cautious not to put money in the
market if they are likely to get too emotional. That said, we believe that currently Disney, along
with the rest of the market, has suffered a large blow in confidence from investors looking to
protect their money. The cause for this confidence loss is the basic concept of fear and as people
watch the market take hit after hit they become paranoid and try to get rid of their investments
and salvage as much money as possible. Those investors trying to find a hot tip to make a quick
buck have not found a stock with Disney.

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For the long term investors who want to distance themselves from the notion of shortterm market trends and gains, and want to make the intelligent long term decision, Disney could
be a great option. At this moment in time it is hard to put a finger on a surefire company, but that
uncertainty is due to the economic crisis happening right now. However, based on the companys
financial statements, we recommend that current shareholders hold onto the companys stock.
This strategy seems to be the most efficient and safest one for the time being. Disney offers a
multitude of innovative products and ideas and it is this simplicity that has geared them towards
success in all of their years of operation.
For those who are looking to invest in safe long term stocks while the market is down, we
recommend buying Disney around a target price of $22 in the current market conditions. We
estimate that in the current downturn for the economy that at some point the stock may get as
low as $22 at which point we would recommend purchasing the stock as a large-cap long term
investment. At the current price around $25 the stock is still attractive to investors over the long
term as the price just before the market crash was over $32 and should be back there once the
economy turns around. The key here is to only buy as a long term investment.

Notes
Late 2004-2005 During this time in The Walt Disney Co.s history, there was some
management restructuring that caused the stock prices to drop. According to Wikipedias
The Walt Disney Corporation this was the time period during which Bob Iger replaced
Michael Eisner as CEO of Disney after Roy E. Disneys public rally to force Eisner out.
(LA Times) Over the period of 2005, the stock price dropped about $29.30 to a low of
$22.98.

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Early 2006 As a new years gift to its shareholders in 2006 Disney purchased Pixar for $7.4
billion and beloved Steve Jobs becomes a board member at Disney. During this time
after that acquisition the stock price went from $23.97 to $35.21 during 2006. (Yahoo
Finance) This period showed growth based on investors increased confidence in the
companys management and its decisions, and perhaps a sign of love from the investors
to Steve Jobs.
September-October 2008 The credit crisis hit and Disney shares declined from about $34.39 to
its current price of about $25. (Yahoo Finance)

References
http://www.secinfo.com/duHyz.31a.htm - SEC 8K Report
Disney 2007 10K Report from Disneys Corporate Website
www.investopedia.com
www.wikipedia.com
Standard & Poors
www.google.com
www.12manage.com
http://www.make-money-stock-value-investing.com
www.hoovers.com
http://finance.yahoo.com/
http://ezinearticles.com
http://www.ustreas.gov/offices/domestic-finance/debt-management/interestrate/yield.shtml
http://quicktake.morningstar.com/StockNet/StockReturns.aspx?
Country=USA&Symbol=DIS
Textbook: Essentials of Investments 7th edition by: Bodie, Kane, and Marcus

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WSJ.com Wall Street Journal Disneys Magic Is Starting to Wear Thin & Disneys Theme
Parks Help Net Rise 9%
http://articles.latimes.com/2004/jan/28/business/fi-disney28 Roy Disney Urges Vote Against
Eisner
http://moneycentral.msn.com/companyreport?Symbol=DIS
http://finance.google.com/finance?q=NYSE:DIS
http://corporate.disney.go.com/investors/fact_books/2007/book.html
http://corporate.disney.go.com/investors/quarterly_earnings/2008_q3.pdf

http://money.cnn.com/2006/01/24/news/companies/disney_pixar_deal/
www.firstshowing.net Disney and Pixars Full Animated Line-Up Through 2012

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