The Walt Disney Company

The Walt Disney Company

Leo Ryan

Capella University

May 31, 2011

The Walt Disney Company 2

Table of Contents

Executive Summary ...........................................................................3

Stock Selection .................................................................................6

Industry, Company, and Competitor Descriptions..........................................9

Financial Analysis ..............................................................................14

Charts..............................................................................................25

References.........................................................................................27

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Executive Summary

The Walt Disney Company is the largest media conglomerate in the world in terms of revenue. Founded on October 16, 1923, by brothers Walt Disney and Roy Disney as the Disney Brothers Cartoon Studio the company was reincorporated as Walt Disney Productions, Ltd. in 1929, and became publicly-traded as Walt Disney Productions in 1938. Walt Disney Productions established itself as a leader in the American animation industry before diversifying into live-action film production, television, and travel. Taking on its current name in 1986, The Walt Disney Company expanded its existing operations and also started divisions focused upon theatre, radio, publishing, and online media. In addition, it has created new divisions of the company in order to market more mature content than it typically associates with its flagship family-oriented brands (Crawford, Franz & Smith 1998)

Sometimes conventional wisdom is wrong. In the case of The Walt Disney Company conventional wisdom states that the popularity and ubiquity of its brands insulates them from economic conditions. This wisdom does not take into account the reality that it takes money to go to the theme parks, advertising on networks trails off in recessions and movie production requires large upfront investments for uncertain returns.But in Disney's diversified asset base has helped the company to weather the downturn in relatively good order. Revenue rose about 6% overall as strength in the cable and film business helped to offset iffy results in broadcast TV and theme parks (Rosen 2007). Their margins likewise have stayed strong, even as the company lays out significant money for programming rights for ESPN. One note of caution on the margins, though. Successful movies like Alice in Wonderland can certainly boost profitability, but seemingly every studio has a dry spell from time to time and these dry spell are hard to predict (Stensland 2005).

Disney's management has some rather special challenges to navigate. On one hand, Disney is a juggernaut in terms of brands and characters, and those stretches across national borders. While it is not impossible that a firm in China or Japan could launch a compelling brand or character, matching Disney's portfolio would take decades, and there is no guarantee that a rival could

leverage a brand the way Disney does (Heffes 2002). On the other hand, Disney has to increasingly make large moves and take bigger risks to show any real growth. The company

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paid up for Marvel, has shelled out a lot of money for soccer rights and faces a cost of competing in TV with Comcast, General Electric, CBS and News Corporation that just keeps going up every year. With Comcast building its regional sports offerings and looking to expand the Versus network, Disney could feel a little heat on its flagship ESPN franchise, while the ratings for ABC have left it fourth out of four for much of this TV season (Stensland 2005). In a similar vein, the company's calculated risk to start rolling back on discounts for its theme parks is interesting - the economy is not yet back to normal, and the fact that park reservations are down 10% for the fiscal third quarter could be a problem.

Analyzing Disney as an investment option is not an easy task. There certainly is no other company quite like Disney in terms of brands and customer goodwill. On the other hand, the returns on capital have never been great, so what good are those intangibles really, if they do not translate to high return on investments (McChesney 1993). Since Disney is really not that cheap, I would rather look at an idea like France's Vivendi or General Electric - other companies, but ones that seem quite cheap relative to its quality and prospects.

Media and entertainment companies are stirring, but their business is not yet rising. With Disney especially, there is promise on the horizon. As for Disney's amusement parks, which are vacation destinations, Disneyland and Disneyworld remain terrific attractions. These should benefit when the economy picks up and consumers emerge from their economic bunkers and start doing a bit of traveling. The Disney movie studio has been in a makeover during the bad economy. It cut costs while continuing to produce creatively (Stensland 2005). Marvel properties should contribute with a boost when they are integrated. And there is no reason Disney's cable

division will not keep producing robust revenues while the rest of its divisions wait for the economy to catch up.

The bottom line is that Disney is still the best of the media companies, with more things going for it than any other organization. Its divisions fit together with superior synergy. Its television division has essentially hedged the other lagging divisions through this recession - something a classic conglomerate that works should do. Disney's assets are considerable and its brands are unassailable. Watch for Mickey Mouse to roar when the economy