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Student Managed Investment Fund
Consumer Discretionary | Fall 2015
Table of Contents
Economy
Sector
Industry
Company Snapshot
Media Networks
Disney-Branded
Financial Analysis
Valuation
Economic OutlookUnited States• Unemployment at 5-year low 5.0%• Disposable Income 3.34% Annualized
Growth Rate (based on 0.83% CQGR over 18 Quarters)
• Wage growth around 1.0% Q/Q in 2015• Inflation (Core PCE Price Index)
1.3 Y/Y Oct – Flat M/M• Real PCE growth stronger than 2014• Expansionary Consumer Future
Expectations• Low Gasoline prices
11 Q111 Q3
12 Q112 Q3
13 Q113 Q3
14 Q114 Q
315 Q1
15 Q3
1050011000115001200012500130001350014000
-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%
U.S Wage Growth vs Disposable Income
Disposable IncomeWages Q/Q Growth (%)Moving average (Wages Q/Q Growth (%))
% C
hang
e Q
/Q
Billi
on U
SD
Unleaded Gasoline Futures – March ’16 - $1.33Source: CME Group
Economic OutlookChina• Slowing GDP Growth 6.8% (IMF)• Strong Wage Growth• Inflation lower in 2015 at 1.5% Y/Y• Consumer Confidence at Dec ‘14 level• Strong Retail Spending 11.0% Y/Y (Oct)• Middle class spending in Asia-Pacific region
42% of Global Total (OECD Development Center)
• Slowing industrial production “only” 5.6% Y/Y growth in October 2015
Sector Outlook
11/28/2014
12/09/2014
12/20/2014
12/31/2014
01/11/2015
01/22/2015
02/02/2015
02/13/2015
02/24/2015
03/07/2015
03/18/2015
03/29/2015
04/09/2015
04/20/2015
05/01/2015
05/12/2015
05/23/2015
06/03/2015
06/14/2015
06/25/2015
07/06/2015
07/17/2015
07/28/2015
08/08/2015
08/19/2015
08/30/2015
09/10/2015
09/21/2015
10/02/2015
10/13/2015
10/24/2015
11/04/2015
11/15/2015
11/26/201580
85
90
95
100
105
110
115
120
S&P 500 vs. S&P 500 Consumer Discretionary Sector
S&P 500 Consumer Discretionary (Sector) (TR) S&P 500 (TR)
Nor
mal
ized
Inde
x Va
lue;
Nor
mal
ized
as o
f Nov
. 28,
201
4
Consumer Discretionary Drivers:
Disposable Income Consumer Expectations Consumer Spending
“Cord Cutting” due to price
hikes
Need for customization of
packages
Comfort/Ease of Access
Online Video
Media Industry Overview
Global
2011 2012 2013 20140
100020003000400050006000700080009000
10000
U.S Home Entertainment Spend-ing
Rental Sell Through Digital
Mill
ion
USD
2011 2012 2013 20140
1000
2000
3000
4000
5000
U.S Home Entertainment Spending - Digital
Electronic Sell Through VOD Streaming
Mill
ion
USD
Media Industry Overview
Market DataPrevious Close 111.89
52-week High 112.08
52-week Low 90
Market Cap 1845B
Outstanding Shares 1.65B
Free Float 1.57B
EPS FY 4.9P/E Ratio 22.83
Diversified worldwide entertainment company with operations in five business segments
Company Overview
31%
14%9%
2%
44%
Revenue Distribution
Parks and ResortsStudio Enter-tainmentConsumer ProductsInteractiveMedia Networks
ESPN, multinational leader in sports, has locked most long-term rights for the next decade
Disney’s unique ecosystem of running created or acquired intellectual property through its lines of business
Catalysts: Star Wars (Dec 18) & Shanghai Disney (Spring 2016)
31%
14%9%
2%
44%
Parks and Resorts Studio Entertainment Consumer Products Interactive Media Networks
Company Overview: Revenue Distribution
Media Networks
The acquisition of long-term sports rights ensures that no significant shift from current preeminent position in rights
ESPN reaches 50% larger audience than all other national sports networks combined
ESPN leads the market in the digital field
E S P N N F L n e t w o r k
F o x S p o r t s 1
G o l d C h a n n e l
N B C S p o r t s
M L B N e t w o r k
N B A T v F o x S p o r t s 2
975
163
123
110
96 68 55
23
A v er ag e min u t e h o u seh o ld au d ien c es (000)
Non-ESPN638
975+53%
T V O n l y T V + 1 T V + 2
5:038:08 8:52
3:43
8:20
Time S p en t wit h ES P N Med ia P er A d u lt User in t h e Av er ag e Mo n t h
TV Digital or Radio
• 6 main locations (theme parks & resorts)
• 148,341,000 visitors in 2014
• Economic Outlook Stronger PCE• MyMagic+ technological Innovation• Projected 7.0% average annual sales growth during
the next five years for parks and resorts.
• 4 Cruise Ships: Fantasy, Dream, Magic & Wonder
• ROIC's in the mid to high-teens for the new cruise ship
operations
• Constant renewal of shows, stands and visuals with Disney’s successful brands. ie: Star Wars
Parks & Cruise LineParks & Resorts Cruises
2010 2011 2012 2013 20140
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
Historical 5 Year Revenue - Parks and Resorts
Revenues % Change OI OI/Rev
5 year economic
plan: consumer
led
Lower yuan stimulates
tourism
China lifts 1-Child Policy
Largest growing middle Class
GROWTH OPPORTUNITY
• Joint venture with Shanghai Shendi partners
• Features six themed lands, two hotels, a park, and a
shopping & entertainment district
• Location: Next to country's 3rd largest airport
330 million people live within a three-hour drive
China's fastest growing city in population,
income, investment, and tourism
• Government offered land for additional expansion
Parks & Cruise LineShanghai Disney Resort
Studio Entertainment PipelineMovie Consumer
Products Books/Comics Educational Materials Clothing Video Games Attractions
Film Release ScheduleName Producer Release DateThe Good Dinosaur Pixar 11/25/2015Star Wars: The Force Awakens Lucasfilm 12/18/2015The Finest Hours Walt Disney Pictures 01/29/2016Zootopia Walt Disney Animated Studios 03/04/2016The Jungle Book Walt Disney Pictures 04/15/2016Captain America: Civil War Marvel 05/06/2016Alice: Through the Looking Glass Walt Disney Pictures 05/27/2016Finding Dory Pixar 06/17/2016The BFG Walt Disney Pictures 07/01/2016Pete's Dragon Walt Disney Pictures 08/12/2016Doctor Strange Marvel 11/04/2016Moana Walt Disney Animated Studios 11/23/2016Star Wars Anthology: Rogue One Lucasfilm 12/16/2016Beauty and the Beast Walt Disney Pictures 03/17/2017Ghost in the Shell DreamWorks 06/14/2017Guardians of the Galaxy Marvel 05/05/2017Star Wars: Episode VIII Lucasfilm 05/26/2017Pirates of the Caribbean: Dead Men Tell No TalesWalt Disney Pictures 07/17/2017
Global Box Office $1.1 Billion -
highest-grossing animated film of
all time
2016 -Frozen flume ride (Epcot)
Impact on 3Q2014: Consumer Products revenue jumped 22%
Disney is launching a short film
called "Frozen Fever"
“Frozen Free Fall” Surpasses 100
Million Downloads
• Revenue– 5 Year Sales CAGR = 6.63%– “Recession Resistant”
• Improving Margins• Major revenue from United
States– Limited impact of strong USD
• Stock Repurchase Program– Undervalued stock
Financial Analysis
74%
13%
9% 4%
Regions
United States and Canada EuropeAsia Pacific Latin America and Other
'11 '12 '13 '14 '15 $ -
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
Basic EPS
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 0
10,000.0
20,000.0
30,000.0
40,000.0
50,000.0
60,000.0
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Total Revenues
Revenues Y/Y growth Net Income Margin
Financial Analysis
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 0
2,000.0 4,000.0 6,000.0 8,000.0
10,000.0 12,000.0 14,000.0 16,000.0 18,000.0
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
Parks/Resort
Revenues Y/Y growth
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 0
5,000.0
10,000.0
15,000.0
20,000.0
25,000.0
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Media Segments
Revenues Y/Y growth
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 0
500.0 1,000.0 1,500.0 2,000.0 2,500.0 3,000.0 3,500.0 4,000.0 4,500.0 5,000.0
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Consumer Products
Revenues Y/Y growth
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 0
1,000.0
2,000.0
3,000.0
4,000.0
5,000.0
6,000.0
7,000.0
8,000.0
-20.0%-15.0%-10.0%-5.0%0.0%5.0%10.0%15.0%20.0%25.0%
Studio Entertainment
Revenues Y/Y growth
Financial Analysis
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
0.0x
10.0x
20.0x
30.0x
40.0x
50.0x
60.0x
Observations:• Improved ROA & ROE compared to
Pre-recession levels• Since 2011
• 2.7% improvement in ROA• 5.0% improvement in ROE
• Capacity to take on more Debt• EBIT/Interest Exp. ‘15 = 50.1x• Debt/Equity ‘15 = 35.6%• Current Ratio ’15 = 1.2x
17%
9%2%
29%
35%
8%
Assets
Studio Entertainment Consumer ProductsInteractive Parks and ResortsMedia Networks Corporate
Disney vs. Comps
Walt Disney Company (NYSE:DIS)
Narrow Comps (Mean)
Wide Comps (Mean)
Gross Margin % 25.2% 44.1% 47.4%
Net Income Margin % 15.98% 18.88% 5.51%
LTM Revenue Growth 7.48% (5.50%) 1.77%
Total Debt/Capital % 26.27% 59.49% 60.43%
Trailing P/E 24.40x 11.60x 19.60x
Forward P/E 21.10x 12.79x 18.50x
Business Lines in comparisonSegment Disney CBS News Corp. Time Warner Viacom
Films × × × ×Theme Parks × ×Cable Networks × × × ×Broadcast Networks × × × ×TV Stations × × ×Radio × ×Internet × × × ×Consumer Products × × × ×
Valuation
AverageComps EV/EBITDA
Comps P/BComps P/E
DCF EBITDA Exit MultipleDCF Perpetuity Method
80.00 90.00 100.00 110.00 120.00 130.00 140.00 150.00 160.00
Football Field Analysis
Target Price (USD)
Sensitivity Analysis - Exit Multiple $ 128.19 8.1% 8.6% 9.1% 9.6% 10.1%
15.00x $ 141.49 $ 138.97 $ 136.50 $ 134.09 $ 131.73
14.50x $ 137.18 $ 134.74 $ 132.35 $ 130.01 $ 127.72
14.00x $ 132.87 $ 130.51 $ 128.19 $ 125.93 $ 123.72
13.50x $ 128.57 $ 126.28 $ 124.04 $ 121.86 $ 119.72
13.00x $ 124.26 $ 122.05 $ 119.89 $ 117.78 $ 115.72
Sensitivity Analysis - Perpetual Growth $ 139.41 8.9% 9.0% 9.1% 9.2% 9.3%
6.0% $ 140.16 $ 135.40 $ 130.94 $ 126.76 $ 122.84
6.1% $ 144.88 $ 139.78 $ 135.03 $ 130.59 $ 126.42
6.2% $ 149.94 $ 144.48 $ 139.41 $ 134.67 $ 130.23
6.3% $ 155.39 $ 149.53 $ 144.09 $ 139.03 $ 134.30
6.4% $ 161.28 $ 154.97 $ 149.13 $ 143.70 $ 138.65
Summary
Target Price $ 130.78
Current Price $ 112.25
Upside 16.51%
Buy!
Reasons for undervaluation:
1. Underestimation of Chinese Market2. Star Wars potential in Disney’s
ecosystem isn’t priced in3. ESPN market overreaction
Consumer Discretionary speakers:Sebastian Dill | Sector ManagerJose Laphitzondo | Associate Manager
Questions?
ESPN’s block off from negative aspects of consolidation of cable industry
Defense!
ESPN exclusive long term control of sports rights for decades Supplier Power
A-La-Carte system benefit would be offset by higher cost per channel. ie: Apple TV suspended because media companies that want more money for their programming.
Sports value relies on it being LIVE
Dual revenue stream, strong position in advertiser’s eyes.
• China (Parks & Movies)• SVOD affiliations
(Netflix, Hulu, Maker)• Huge Film pipeline &
end product variety• Tech Start-Up
“Accelerator” Program with Techstars – 2nd year
• “Cord Cutting” at Cable Networks (ESPN, ABC)
• Cost increases at Sport Networks• Regulation (Media Segment)• Intellectual Property Infringement
• Heavy Capital Expenditure requirements
• Media segment as major source of revenue• ESPN• ABC
• Competent Management• Diversified Revenue streams• Strong revenue & FCF growth• Brand status• Technologically Innovative
• MyMagic+• 3D printed toys
Strength Weaknesses
OpportunitiesThreats
SWOT Analysis
Economic Outlook - USHigh correlation between PCE and GDP 68.5% of GDP (as of 2013, IMF)
Real PCE slower increase than expected
Savings rate increase in Q3 2015 5.0% (Q2) vs. 5.2% (Q3)
PCE Drivers:
1. Unemployment2. Wages3. Price Level4. Consumer Confidence5. Strong USD 6. Gasoline Prices
Source: Bloomberg
12/2014
1/2015
2/2015
3/2015
4/2015
5/2015
6/2015
7/2015
8/2015
9/2015
10/20150.0
20.0
40.0
60.0
80.0
100.0
120.0
4.7
4.8
4.9
5.0
5.1
5.2
Consumer Future Expectations
Conference Board ExpectationsConference Board Inflation Expectations
Econ
omic
Expe
ctati
ons
Infla
tion
Expe
ctati
ons
Economic Outlook - China
Global
Diversified across various platforms
1. Hulu (33%) owned• Rumors about possible inclusion of
Time Warner• Underestimated• New Ad-free service
2. Netflix• Exclusive Movie Pay Windows 1 & 2
for movies 2016 – 2018• Pressured to include
advertisements/Commercials3. Maker Studios (acquired 2014)
• Leader in Short-Form Video (650 subscribers)
Digital
GROWTH OPPORTUNITY:Technological Innovation
Disney Accelerator
MyMagic+• Tech Start-Up Accelerator Program
(2014 – present)• In partnership with TechStars
• Firms in Consumer Entertainment/Media
• Funding• $20,000 up-front• $100,000 convertible debt note
• 3-Months Mentor program• Top Disney Executives• Investors• Entrepreneurs• Legal Experts• Venture Capitalists• Etc.
• $1 Billion project functional in 2015• Bracelet acts as:
• Door Key• Wallet• FastPass
• Provides better guest experience• Allows Disney to better study visitors
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