Case Study Notes

Case Questions

1- Is Disney liquid compared to its peers?

2- Does Disney manage its assets effectively compared to its peers?

3- Does Disneys debt load suggest trouble paying its creditors?

4- Compare Disneys profitability to its peers.

21,922 36.5% 46.7% 24,701 41.1% 6,095 38.8% PECP Studio Entertainment 10,065 16.7% 19.1% 3,414 5.7% -738 -4.7% -668 -10 Eliminations Total 59,434 HOW DISNEY MAKES MONEY PARKS, EXPERIENCES & CONSUMER PRODUCTS A previous Disney Case used the company's financial statements Parks, Experiences & Consumer Products revenue includes to determine how Disney makes money. A few pertinent points ticket sales to Disney theme parks and cruises, merchandise sold have been summarized here as they relate to this Disney Case. at The Disney Store retail locations, and more. The segment's Disney has four operating segments--Media Networks, Parks, revenues have been on a general upward trend. It seems rea- Experiences & Consumer Products, Studio Entertainment, and sonable that this segment is subject to the success of the other Direct-to-Consumer & International. The table below shows the three segments, with the Studio Entertainment segment's suc- proportion of Disney's total revenues and operating income that cess having the greatest imapct. Data shows that popular charac come from each segment. ter movies, like Finding Nemo, significantly increase purchases of products related to the film. Disney also centers most of its Disney Segment Revenues and Operating Income new theme park and experience entertainment on recent movie AN Data from Fiscal Year 2018 in Millions, Except Percentages success like the Star Wars park in Disneyworld. In your analy- Revenues % of Total Operating Income % of Total sis, consider the changes in operating margins in this sector. Media Networks 7,338 MEDIA NETWORKS 3.004 The company owns and operates a number of media networks, DCTI including ESPN, Disney, and ABC. With the advent of Netflix, Hulu, and Amazon Prime, consumers have completely changed how they view and consume media content. Using ratios like 15,689 operating margin and asset turnover, think about how you Source: The Walt Disney Company Annual Report (10-K) believe Disney may be able to compete in this changing market. A NOTE ON RATIOS AND COMPARISONS STUDIO ENTERTAINMENT During routine medical examinations, patients often have their This is the company's movie making business. Movie making is blood drawn and tested. Blood test results are displayed in a often considered an "eat what you kill" business. This means table of numbers. Each number is a ratio that specifies how that movie makers are judged on the value of their current cre- much of a particular substance was found in a particular mea-ation. A number of trends in this segment significantly impact sured volume of blood. In isolation the results are not partic- the company as a whole. Revenue growth is spotty with notice ularly useful. To make better use of the data, test results are able periods of up and down. Assets have increased through compared to data from other similar healthy individuals as a three purchases of competitive studios: Pixar, Marvel, and Lucas reference and benchmark. Films. For this segment, focus on three things: the number of Financial ratios act like a blood test for a company. They films produced, the operating margin, and the average reve- often give analysts advance notice of operating or financial dan nue per film. gers being experienced by companies when compared against their healthy peers. But what exactly constitutes a peer. DIRECT-TO-CONSUMER & INTERNATIONAL Disney has four discrete operating segments. No other com- The Direct-to-Consumer & International segment includes busi- pany in the world has a similar structure. Consequently, we nesses like ESPN+, Disney+, and Hulu streaming services. These are not likely to find a strict comparable company to serve as businesses generate revenue from subscription fees charged to a benchmark for ratio comparison. Very few companies have customers/subscribers for Disney's DTC streaming services. For peers that are strictly similar. this segement, focus on programming and production costs, as well as technical support costs. CASE CLUES The four case questions are tied to particular ratio segments and can be answered by limited assessment of Disney's ratios. The following clues may be useful in answering the final case question. The Walt Disney Company has four operating segments: Media Networks, Parks, Experiences & Consumer Products, Studio Entertainment, and Direct-to-Consumer & International. Each of these segments operates within different environments. The Walt Disney Company Peer Comparison Ratios Entertainment Content Facilities DIS Equity TWX Equity CBS Equity VIAB Equity VIV FP Equity DISCA Equity NFLX Index SIX Equity SEAS Equity MERL LN Equity Disney Time Warner CBS Viacom Vivendi Discovery Scripps Six Flags Sea World Merlin FUN Equity Cedar Fair Liquidity Ratios Current Ratio Quick Ratio 0.90 0.58 1.08 0.85 1.32 0.87 1.38 1.06 0.78 0.62 1.61 1.29 0.90 0.80 1.11 0.83 0.42 0.22 0.61 0.35 0.91 0.76 Asset Management Ratios Asset Turnover Ratio Fixed Asset Turnover Ratio Days Sales Outstanding Inventory Turnover Ratio 0.33 2.20 73.83 29.04 0.47 12.09 108.92 8.90 0.62 7.79 86.58 7.63 0.54 13.95 91.55 8.18 0.44 7.08 118.59 31.20 0.32 9.07 90.46 #N/A N/A 0.67 11.25 8.55 #N/A N/A 0.34 0.67 41.56 2.00 0.39 0.51 17.83 1.87 0.37 0.54 6.90 6.28 0.40 0.56 23.17 1.89 Debt Management Ratio Deb Asset Ratio Debt to Equity Ratio Market Debt Ratio Interest Coverage Ratio 24.30 45.83 0.29 8.07 34.36 42.25 83.80 157.42 #N/A N/A bt Applicable 6.52 4.44 36.91 99.74 #N/A N/A 5.03 53.84 0.26 12.29 48.53 136.82 0.95 4.44 8.19 215.93 0.09 4.16 85.82 #N/A N/A 1.40 3.78 02 796.58 1.28 2.53 31.10 #N/A N/A #N/A N/A 2.46 #N/A N/A 1.58 2.99 Profitability Ratios Gross Margin Operating Margin Net Margin 39.60 17.03 15.89 43.57 25.33 16.78 38.07 15.36 11.89 46.74 19.18 12.06 44.36 8.66 9.96 65.73 27.00 18.57 38.28 12.92 9.26 91.24 29.18 12.04 92.21 15.25 6.40 81.78 13.28 7.01 91.44 20.98 11.69 The Walt Disney Company Historical Ratios (Trend Analysis) FY 2000 FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 Liquidity Ratios Current Ratio Quick Ratio 0.96 0.81 1.19 0.53 1.10 0.66 1.00 0.68 0.96 0.67 0.85 0.60 0.94 0.70 0.99 0.76 1.01 0.72 1.33 0.93 1.11 0.77 1.14 0.76 1.07 0.76 1.21 0.93 1.14 0.82 1.03 0.73 1.01 0.78 0.94 0.70 0.69 0.59 Asset Management Ratios Asset Turnover Ratio Fixed Asset Turnover Ratio Days Sales Outstanding Inventory Turnover Ratio 0.57 2.15 48.69 28.47 0.57 2.00 50.33 31.42 0.54 1.97 53.26 33.51 0.54 2.13 55.89 34.76 0.59 2.11 52.34 36.14 0.60 1.91 52.38 39.74 0.60 1.98 50.11 43.02 0.59 2.05 49.92 42.97 0.61 2.16 50.04 34.49 0.58 2.06 52.48 25.43 0.58 2.15 50.87 23.10 0.58 2.18 52.21 21.81 0.58 2.05 52.78 14.99 0.58 2.05 53.66 16.56 0.59 2.14 53.67 17.26 0.61 2.16 53.18 18.04 0.62 2.12 52.58 20.26 0.59 1.98 53.04 21.94 0.61 2.05 48.63 23.67 25.05 Debt Management Ratio Debt to Asset Ratio Debt to Equity Ratio Market Debt Ratio TIE Ratio 50.24 21.01 38.69 0.12 3.30 22.30 42.37 0.26 5.54 28.26 59.22 0.46 3.14 26.21 54.09 0.32 3.88 23.49 45.47 0.26 6.02 22.64 40.96 0.21 7.28 24.90 47.34 0.22 8.72 23.42 43.48 0.24 9.57 20.51 36.54 0.26 8.60 18.38 32.33 0.20 12.26 19.80 36.20 0.27 14.83 19.51 34.83 0.16 15.96 17.95 30.28 0.12 21.52 17.90 31.25 0.10 30.98 19.91 36.09 0.11 35.26 22.13 43.03 0.14 29.12 26.55 55.10 0.17 23.36 21.33 38.97 0.12 18.39 0.30 6.10 Profitability Ratios Gross Margin Operating Margin Net Margin Return on Total Assets Return on Common Equity 16.07 11.21 3.62 2.07 4.08 14.30 11.25 (0.63) (0.36) (0.68) 9.50 9.41 4.88 2.63 5.36 10.09 10.03 4.68 2.53 5.36 13.16 13.16 7.63 4.51 9.40 12.86 12.86 7.93 4.73 9.69 15.87 15.87 10.00 5.96 11.63 19.23 19.23 13.20 7.75 14.98 19.57 19.57 11.70 7.17 14.04 15.76 15.34 9.15 5.27 10.01 17.67 17.33 10.41 5.99 11.12 19.03 19.08 11.76 6.80 12.84 44.49 21.29 13.44 7.73 14.73 44.42 20.35 13.62 7.86 14.41 45.88 23.29 15.37 9.07 16.60 45.94 25.21 15.98 9.73 18.73 46.09 25.81 16.88 10.42 21.39 45.04 25.16 16.29 9.56 21.23 44.94 24.96 21.20 12.96 27.97 Market Value Ratios Price to Earnings Ratio Price to Cash Flow Ratio Market to Book Value Ratio 78.06 12.33 3.35 19.20 12.74 1.65 25.66 13.51 1.30 31.03 14.20 1.71 19.60 10.57 1.73 19.94 11.46 1.85 19.94 10.23 2.01 18.01 12.71 2.19 14.43 11.37 1.88 15.02 9.49 1.47 16.08 9.71 1.69 11.87 8.10 1.42 16.95 11.77 2.37 18.82 12.36 2.58 20.52 15.79 3.36 19.94 15.99 3.70 16.23 11.52 3.43 17.29 12.52 3.62 16.56 12.26 3.57