After sharing my first International stock purchase of Disney in the previous post, some readers have asked for a little more detail around the business and the numbers.
Well, I’m going to try and give you much more than you bargained for, with some detailed Discounted Cash Flow (or ‘DCF’) Analysis!
The goal of this post is not to convince you that Disney is an awesome investment. It’s to show you how to use some valuation concepts, particularly the DCF analysis, but in particular, highlight the risks and limitations of relying on this too heavily in isolation.
So strap yourself in – it’s a long post with plenty of analysis, and we’re going to touch very briefly on a few theoretical valuation concepts. But don’t worry, we’ll still include plenty of charts and pictures…
Here’s an overview of what we’ll cover in this post:
- Overview of Disney
- History of financial performance
- Valuation methods
- Cash flow forecast assumptions
- Other valuation assumptions
- Sensitivity Analysis
- And most importantly – The DANGERS of the DCF!
Overview of Disney
I’m guessing anyone reading this will know of Disney, particularly the movies and the theme parks that it’s so famous for, as well as some of the history starting with Mr Walt Disney back in the 1920’s.
From a business perspective, Disney manages its operations in four main segments:
- Media Networks – Disney operates cable programming services under brands including ESPN, Disney and Freeform, broadcast businesses including ABC TV Network and eight other television stations, radio businesses including ESPN Radio network, and Radio Disney.
- Parks and Resorts – the Magical Disneyworld in Florida and various Disneyland resorts and theme parks around the world, including California, Paris, Tokyo, Hong Kong and Shanghai, as well as a number of resort hotels and vacation club properties, and other recreational facilities.
- Studio Entertainment – Disney produces live-action and animated motion pictures primarily under the Walt Disney Pictures banner (all the classics!), as well as Pixar, Marvel and Lucasfilm which Disney acquired in recent years.
- Consumer Products and Interactive Media – Disney licenses its trade names, characters and intellectual property to various manufacturers, game developers, publishers and retailers throughout the world. This also includes retail and online distribution of products through The Disney Store, shopDisney.com, shop.Marvel.com and wholesale distribution direct to retailers.
Here’s a breakdown of the revenue and operating profit contribution from each of these four segments in 2017: