Analyzing Walt Disney Company

Introduction

Walt Disney Company was established in 1923 is going great guns even in 2008. An endeavor is undertaken in this write-up to evaluate and analyze the financial and business performance of the company. Ratio calculations have been used to assess financial performances. Starting with company history, companies latest alliances, and subsidiaries, assessment has been made on basis of information gathered from different sources, mostly company annual return 2007, company’s web sites, information of the company at Yahoo.Com. and from other sites.

Company History

Originally known as Disney Brother Cartoon Studio, the Walt Disney Company was established in 1923. The founder Walter Elias Disney (Walt) created a character called Oswald the Lucky Rabbit and made 26 Oswald cartoons in 1927, the very first of its creation. Then in 1928 Walt designed a character named by his wife Mickey and created a sensation in a cartoon world. He made a series of Micky Mouse cartoons and then created another series called the Silly Symphonies. This won him an Academy award in 1932 for best cartoon series. This was followed by ‘Three little Pigs’ in 1933. The first feature film based on the story of Snow White and Seven Dwarfs took three years to produce and it was an unparallel success story. In 1950 the Studio completed live-action film The Treasure Island, in 1954 the Disneyland anthology series was launched, and in saw TV most popular series The Mickey Mouse Club. The Jungle Book in 1967 and The Aristocrat in 1970 once again established the authority of Studio in animation. Disneyland developed in 400 acres in Florida was opened in 1971 with Disneyland style theme park. This was followed by EPCOT Center and Tokyo Disneyland. In 1983 Disney Channel was established followed by Touchstone Televisions in 1986 to produce network TV shows. In 1989 Disney animation experience a renaissance and the result was that ‘Aladdin’ in 1992 grossed more than $200 million in the US. Disney also turned to music, books for children, and was awarded a franchise for the National Hockey team in 1993.

In 1994 Disney ventured into Broadway and produced plays like Beauty and Beast and many other grosser. In 1996 Disney acquired Capital Cities/ABC. The company has 10 TV stations, 21 Radio stations, seven daily newspapers, sports network ESPN, cable network A& E, and many others.

In 1998 the company entered the cruise business, and in 2001 opened two new theme parks. The company has produced grosser like Pirates of the Caribbean, The Curse of Black Pearl, and many others. In 2005 Robert Iger became CEO and arranged for Disney to become the first broadcaster to have its TV shows made available on Apple iPods. In 200 the company acquired Pixer Animation. The performance of Studio in 2006, the first year of Iger, has been spectacular with outstanding financial results. Great films like Pirates of Caribbean, Dead man’s chests and cars; and great success of ABC has positioned the Studio to its peak once again.

Though a lot has changed from Oswald days but providing quality and innovative entertainment to family audience has always remained the basic objective of the Studio.

Geographic Presence

Based in California, Walt Disney Company has a world- wide presence. In US, the country of its origin it has Walt Disney World Resort at Florida, in California it has Disneyland Resort, Disney vacation clubs, Disney Cruise Line, and ESPN Zone facilities. The company has Disneyland Resort in Paris, Disneyland resort in Hong Kong, Tokyo Disney resort in Japan. The company is also designing and developing various theme parks in different parts of the world. The other segments of the company like Studio Entertainment segment produces action and animated motion pictures that are distributed every part of the world. It also publishes books and magazines, produces computer software, and video game products for words market. In other words that company has captured the audience of the world in one shape of the other. This campany caters audience of ever every age and group of the society of the world.

Key Partnerships, alliances

Tivo Inc., in very latest partnership with Walt Disney, will start a service to download movies from Walt Disney co. directly from televisions and rent to customers.

Disney’s Youth Educational Series and NASA has developed a ‘Space Ranger Education Series’ for children. Various media companies are tying up with Walt Disney company for Home Entertainment project in Europe. These are few key latest alliances of Walt Disney Company.

Major Products, Categories

The company has four major business segments, namely the Park and Resort segments, the Media Network segment, the Studio Entertainment segment, and Consumer Products.

Under Park and resort segments the following activities are taken care of:

  • Walt Disney World Resort at Florida that theme parks, sports complex, hotels and other entertainment arena.
  • Resort at California.
  • Cruise Line.
  • Zone facilities of ESPN.
  • Disneyland resorts at Hong Kong , Paris, and Tokyo.

The Media Network segment embraces the following activities:

  • Television Network that includes 10 TV stations, and operates ABC, ESPN, and SOAP net.
  • Television production and distribution activities.
  • Cable and Satellite network.
  • Radio Network.
  • Internet including Club Penguin, and online virtual world for kids.
  • Mobile operations.

The Studio Entertainment segment has following three major categories to operate upon:

  • Production and acquisition of action and animated motion pictures, video programming, musical recordings and stage shows.

The consumer product segments include the following activities of the company:

  • Licensing of Disney characters, visual and literary properties to retailers, promoters and publishers.
  • Publishing of books and magazines, computer software and video products.

Subsidiaries

  • Walt Disney Internet Group acquired iParenting Media in December 2007.
  • The Walt Disney Company acquired Pixer on May 5, 2006. Pixer is a digital animation studio.
  • The company also acquired Club Penguin Entertainment Inc. on August 1, 2007. NASAN limited was undertaken on February 1, 2007.
  • Very recently in May 2008 itself the Disney Stores chain has been taken over by the company from subsidiaries of The Children Place Retail Stores Inc.

Management Profile

The company is lead by President and CEO Robert A Iger. He assumed office in 2005, and was 7th person to lead the company. Mr. Iger is a person with far sightedness. He always wanted to take advantage of fast changing technologies, and he has shown with growth shown by the company during his leadership so far. The management under the leadership is performing superbly. “Disney performance during Iger’s first year was stellar, with record revenue, record cash flow, and record net earnings for fiscal year 2006. These financial results were driven in large measure by the company’s outstanding creative products, such as films Pirates of the Caribbean, Dead Man’s Chest and Cars, ABC’s desperate housewives, Lost and Grey Anatomy Disney Channel’s High School Musical and Hannah Montana, ESPN’s popular sport coverage, and of course, the beloved attractions at Disney theme parks.” (Company History).

Industry Overview

The company’ rank is almost near the top in most of parameters to assess in Entertainment – Diversified industry. The company is leader in market capitalization sector of the industry. It has second rank in Price/ Earning (P/E) ratio in the industry. It has remarkable revenue growth and it is only next only to CKX Inc. EPS growth rate of Walt Disney puts the company at 2nd place in the industry. Return on Equity is also fantastic and again the company is at 2nd place in this regard. Long Term Debt/ Equity ratio of 0. 51 bringing the company again at second place only next to Gaylord Entertainment Company of 1.217. Out of nine parameters as stated at Yahoo.com, Walt Disney is a t 2nd rank in eight out of them. This put the Walt Disney company at almost controlling level at the level of the industry, that includes companies like Time Warner Inc., CKX Inc. and others.

Strategic Overview

As per President and CEO’s statement in Annual Report10, the company’s strategic objectivity is spelled as under:

  • The priorities of the company are strengthening financial results, growing the value of brands, enhancing the ability meet critical challenges, and building a solid foundation for future growth.
  • To apply operational and financial discipline and mange costs carefully.
  • The priority to strengthen creative engines to create ability to leverage success across so many business of the company.
  • Commitment to high quality creative work focusing on new technology.
  • The most important strategic overview is to make intelligent investments in international markets.

S.W.O.T. Analysis

  • Strengths: Walt Disney Company revenue is increasing year after year. In 2007 revenue increased by 5% on 2006. This makes net financial results more optimistic for the coming years. The company has solid strategic planning by using modern day technologies.
  • Weaknesses: The company is facing liquidity problems. Current and quick ratios are delicately placed. The company may flutter in meeting current obligations as those become due.
  • Opportunities: Overseas markets are opened Virgin international arena is inviting Walt Disney to set foot by planning and opening amusements parks and making consumer product segments adoptable to country’s local tastes.
  • Threats: High costs land costs may dissuade the company to take international initiative.

Financial Analysis

Any company’s financial analysis takes into consideration Return on Capital Invested, Earning per share, and after tax cash flows. On all the three counts Walt Disney Company has achieved the great successes. EPS (basic) has gone up in 2007 to $2.34 from $ 1.68 in 2006 and this is 34% increase over 2006. Change in cash flow in cash and cash equivalent was by $1259m and this is a great achievement when compared to previous year change of $688m.

The profitability growth has been tremendous. Operating profits increased by 33. 6% over 2006. Growth in return on equity was tremendous 43.77%.

There are low assets turnover that will force the Walt Disney Company to think whether the investments in assets in right direction. Delicate current ratio is certainly a warning for the company to take precautions so that strategic objectives do not get lost in routine failures.

Current Financial Performance

Currently the Walt Disney is tasting success under the astute leadership of its President and CEO Robert A Iger. The current financial performance is great concerning profitability but partially at efficiency level of performance. Accounts receivable collection period has gone up. Current ratio may give tense moments to the management. Return on assets is certainly a dismal state of affairs.

However, return on equities is a forceful statement that the company has made during 2007 as well as in 2006. The company is currently strong to take any adversities heads on provided the operating performance continue to grow as in the current rate. Because of this operational growth the company’ total assets have grown from $59998m to $60928m. Net earnings have indeed grown due to increased revenue, but control over overheads have pushed the matter for current management that have maintained stable performances despite gloomy atmosphere all around.

Five Year financial overview

During 2007, profitability has made tremendous growth. Liquidity aspect is delicate and playing truant with the total success. However last five years data on account of Total Revenue, EPS (Basic), Cash from continuous operations, and free cash flow remaining after taxation has been provided hereunder to give an idea some idea about the company during last five years.

Ratio analysis

Ratio analysis

Ratio analysis

Liquidity Analysis

The overall liquidity of a firm exhibits its solvency. Solvency of a company is easily measured through its current ratio and Quick ratio. When current assets meet current obligations timely as those become due, the company is said to be solvent. The best way to analyze the liquidity position of a company is though its current ratio. Current ratio is measured by dividing its current assets with current liabilities to find out how many times the current assets are as compared the firm’s current liabilities.

Generally the higher the current ratio, the more liquid the firm is considered to be. Normally the acceptable current ratio in any industry is 2:1, that is to say current assets being double the current liabilities. However, the acceptable ratio changes from industry to industry. The current ratio of Walt Disney Company is very poor in both 2007 and 2006.

The current ratio in 2007 is hardly 0.99 and even in 2006 it was 0.94. This shows that the liquidity position of Walt Disney Company is very precarious. The company may be finding very difficult to meet its current obligations. The situation has further worsened when we observe that its average collection period of receivable has increased as compared to 2006. This would have further worsened the liquid position.

The company must take some innovative actions to improve its liquidity. One such ways is to raise long term debts and use some of the funds initially to meet short term liabilities till the situation improves.

The quick ratio is part of current ratio. The only difference is that only those assets are used to calculate that can be converted easily into cash. Accordingly inventory is not considered for calculating quick ratio This is mainly because of following reasons:

  • Normally inventories cannot be easily sold as those are not fully completed items as at end of the fiscal period.
  • It is assumed that inventory is generally sold on credit basis and create accounts receivables.

. Walt Disney has quick ratios of 0.94 and 0.87 in 2007 and 2006 respectively. The ratio is not up to mark as quick ratio of 1:1 is considered optimum.

With poor current and quick ratios it can be analyzed that Walt Disney Company may find difficult in meeting current liabilities as those become due.

Profitability analysis

The above chart of ratio analysis contains four ratios to comment on the profitability of the company. These are Operating Profit Margin, Net Profit Margin, Return on Assets, and Return on equities.

“The Operating profit margin is ratio that measures the efficiency of management” (Investing for Beginners).

This ration measures the percentage of each dollar sales remaining after costs of sales and other operational expenses before interest expense and taxes. Walt Disney Company has operating profit margin of 23.42 % in 2007 as compared to 17.53% in 2006. This is a remarkable performance. The management has performed very well in controlling the operational expenses and increasing the margin by 5.89%.

Net Profit margin “tells you exactly how the mangers and operations of a business are performing.” (Finance Scholar.com)5 Net profit margin is calculated after deducting all costs and expenses, including interest, taxes, and preferred stock dividend from the gross margins left by total sales. Walt Disney has earned a net profit margin of 13.2 % in 2007 over its revenue and this is an improvement over 10% in 2006 earned by the company.

That means the available profits to equity shareholders are better in 2007 as compared to 2006. That is why EPS (basic) in 2007 is $2.34 as compared to $ 1.68 in 2006.

Return on assets ratio reflects “how effective the business has been at putting its assets at work. The ROA is a test of capital utilization- how much (before interest and income tax) a business earned on total capital used to make the profit.” (Financial Management)6 The ratio in 2007 was 7.69% as compared to 5.62% in 2006. The company has exploited assets to the fullest use for earning profits.

Return on equity “is a measure of a corporation’s profitability that reveals how much profit a company generates with the money shareholders have invested.” (Investopedia).

Walt Disney has very effectively utilized the investment of equity holders. The ROE in 2007 was 15.24% as compared to 10.6% in 2006. This resounding return on equity must have proven the faith equity holders have put on Walt Disney Company.

Over the company has done tremendously well in 2007. Every calculations of profitability suggest an increase over the performance of earlier years. When we look at the industry News Corporation has done the best with ROE at 17.26%; and the rank of Walt Disney Company is second in this respect. According it can be said that the performance of Walt Disney is more than satisfactory so far as profitability is concerned.

Efficiency analysis

Activity ratios are used to evaluate the efficiency in the working of a company. The idea is to measure the speed with which different accounts get converted into sales or cash. The purpose is to find out inflow and outflow of different assets.

Ratios used to judge the efficiency in working of the company are inventory turnover ratio, average collection period, Total assets turnover, and Times Interest Earned.

Inventory Turnover indicates how fast and effectively the inventory is used in the operations of the company to turn it into sales. In common sense this ratio measures the activity of a company’s inventory. When compared with other firm in the same industry, the inventory turnover reflects the overall operational efficiency of the company.

The efficiency ratio of Walt Disney Company is fantastic 44.82 times in 2007, which has gone up from 40.91 times in 2006. That shows that inventory has rotated 44.82 times itself in the year 2007. This quick turnover of the inventory also suggests that company is maintaining the quality of products being sold.

Average collection period is the average age or number of days of accounts receivables. The faster collection is good sign of using the capital investment and other resources in more resourceful manner. The average age of collection of receivables for Walt Disney in 2007 is 51.72 days, which shows a creeping deficiency when compared to 50.91 days in 2005. The collection period is too long to undone the efficiency created by Inventory turnover. Overall the Walt Disney Company has shown better inventory turnover in the industry, and its average collection period also signs of sluggishness into the operations of the company.

Total assets turnover reflects the efficiency with which the company is using its assets to generate sales. The Walt Disney turns only 0.56 times in 2007 and this is not an up to a standard performance. The performance in 2007 has been worsened when compared to 2006, when assets turnover was 1.06 times. That means either the company has most of assets that are not utilized fully for operative activities, or assets are not completely suitable to the operative objectives of the company.

Times Interest Earned is another efficiency ratio reflecting interest coverage. This ratio measures the company’s ability to make contractual interest obligations. Times interest earned ratio for Walt Disney in 2007 is fantastic 14.03 times. The company has improved to this stage from 9.99 times in 2006. The company is quite capable to meet its contractor interest obligations.

Overall Walt Disney Company has mixed efficiency performance. Inventory turnover is great but average collection period is poor. Again Total asset turnover is very poor but Times interest earned is respectable to meet interest obligations.

Debt ratios analysis (Capital Gearing or leverage)

Debts indicate other people’s money invested in the company. Generally analysts are concerned with long term debts as in long term debts the company enters into contractual repayments of principles and interest thereon.

There is another aspect of debt analysis called analysis of capital leverage or gearing. Capital Gearing is “the mixture of debt and equity in a firm’s capital structure, which influences variations in shareholders profits in response to sales and EBIT.” (LSE).

Capital Gearing implies the ratio of debt and equity funds employed in the company to finance the assets of the company. The company having high ratio of debt financing as compared to owned funds is called high geared company; and the company with more of equity funds as compared to debts funds is low geared.

Besides gearing, debt ratio also reflects how total assets have been financed by the company. Walt Disney Company is a low geared company. Its debt ratio is only 0.5 in 2007 and 0.47 in 2006. Low gearing of capital implies that equity holders cannot take advantage of the fixed nature of interest payments and fixed dividend on preference shares. Once the payment of fixed interest and dividends is distributed, the balance entire profit of the company belongs to equity holders. Accordingly in good times when the company earns more, the equity holders can play with gearing of capital and have the advantage of earning more on their contributions in the equity funds of the company.

But from the point of financing of assets, the company has mostly used equity funds and thus the company faces no such long term liability that may upset its long term objectivity.

Investors Ratios

The major ratios that attract the investors are earning per share (EPS) and Price/ earning (PE) ratio. Earning per share is of interest to both present and future investors and also to the management. EPS represent the earning on behalf of each outstanding common share of the company. It is not the distribution of dividend but the earning per share that may or may not be distributed by the company. But EPS has a definite bearing on the market value of shares.

Walt Disney has an EPS (basic) of $2.34 per share n 2007 and in 2006 it was $1.68 per share. The company has taken big stride in 2007 in earning per share.

Price Earning ratio indicates the price the investors are ready to make for the shares of the company. P/E ratio reflects the confidence of investors into the company. P/E ratio of Walt Disney Company is 14.54 in 2007 and this has come down from the ratio of 18.04 in 2006. This means the confidence of investors was shaken in the company during 2007. This lowering of P/E ratio can be attributed to general gloominess in the market, when we consider that EPS has gone up in 2007 as compared to 2006.

Stock Performance

Stock or inventory performance can be measured through inventory ratio as calculated in previous paragraph of ratio analysis. Inventory reflects how many times it has been rotated to be converted into sales during the fiscal period. The inventory or stock performance is remarkable as it has rotated itself 44.82 times in 2007, and further the performance in 2007 is better than 40.91 times in 2006. This assessment of stock performance is subject to assumption that total costs and expenses in consolidated statement of income below revenue figure has been assumed to be cost of sales.

Comparative Landscape

Revenue analysis

Revenue in 2007 was $35510m as compared to $33747m in 2006, showing an increase of 5.22% over 2006. The company has ascribed the reason for the increase in revenue in its Annual Report 2007 as “primarily due to higher affiliate and advertising revenues at our cable businesses, improved home entertainment performances driven by the success of Disney/ Pixer’s cars, and Pirates of the Caribbean: Dead Man’s Chest, strong sales of ABC Studio productions, increased guest spending and theme park attendance at Walt Disney World and Disneyland Resort, Paris and lower cost of sports programming due to fewer hours at the ABC Television net work.” (Annual Report 2007)

The important thing to note is all segments of the business of the company has contributed toward increase in revenue for 2007 when compared to 2006. If we look at the industry of ‘Entertainment diversified’ to which the Walt Disney company belongs, the growth shown by CKX Inc. As per Yahoo.com 3 CKX has incorporation has shown a revenue growth of 31.5% and is the leader in the industry. Whereas, Walt Disney Company has ranked itself on 3rd number in the industry.

During 2006 the revenue growth was 8% as compared to 2005. In 2006 the revenue was $ 33747m as compared to $ 31374m in 2005. Therefore growth rate of revenue has come down from 8% to 5% when a comparison is made with 2006. Despite this decline revenue stands at good position in the industry when the company stands at number three, and that is appreciable.

Employee strength/ Employee Growth

From strength of only 2 employees in 1923, the company has now employee strength of 137000(Yahoo.com), and the policy of the company about employee management has all along been in comunensurate with changing times. As per company’s philosophy, “The fundamental objectives of the company’s executive compensation policies are to ensure that executives are provided incentives and compensated in a way that advances both short and long term interests of shareholders while also ensuring that the company can attract and retain executive talent.

The company approaches three this objective through three components:

  • Basic salary;
  • A performance based annual bonus, which may be paid in cash, shares of stock, stock units or a combinations of these;
  • Periodic (generally annual) grants of long term stock based compensations, such as stock options, restricted stock units and/ or restricted stocks, which may be subject performance based and/ or time based vesting requirements.” (Executive Compensation Philosophy).

There has been aggressive growth in the employee strength with Disney Company. The company has throughout since its existence followed a policy that employee growth came out of actual business requirements. This way incumbent would always feel at home at the employment atmosphere. The compensation has always been as per the requirement of the job following the laws of the land where actually job has emerged.

Walt Disney Company has all along taken care of the company employees and it is seen and felt by the employees themselves. During various expansions Disney has taken all precautions that it remains a modern equal employer all along its growth and diversifications.

“Disney is an example of a company that understands proper diversification. Walt Disney’s intuitive comprehension of synergy, magic in his lexicon, is the driving force behind the company’s continued success.” (Christopher Krikman).

Return on Capital Employed (ROCE)

“Return On Capital Employed is a ratio which indicates the efficiency and profitability of the capital investment of a company”(12 Manage The Executive Fast Track)

The calculation of ROCE is made as under:

The calculation of ROCE

ROCE is provides an idea about the effective utilization of capital employed in the company. Walt Disney Company has improved ROCE ratio in 2007 that is 16.79% as compared to 11.64% in 2006. That shows that the company has executed its operations more effectively in 2007 and that is why total revenue in 2007 has gone up as compared to 2006. With the result overall profitability has shown improved results as has been stated in ratio analysis above.

Market Capitalization

Simply speaking, market capitalization is the capital of a stock market. For a particular stock it is calculated by multiplying outstanding shares of a company with the share price of that stock. In other words market capitalization is simply totaling or summation of market capitalization of all stock listed on a stock exchange. Market capitalization does not hold relevance to a particular company. However, as Yahoo.com market capitalization in respect of Walt Disney Company is $64.01 billion as at May 30, 2008

Latest News

Company News

  • The company has reported second quarter earnings on May 06, 2008
  • Susan O’Day has been named as the Senior Vice President and Chief Information Officer of the company as per news on May 13, 2008.
  • Disney marks entry into Robotic Toy market with new line of programmable toy Robots.
  • First ever Disney Live!. Disney Live presents three classics fairy tales worldwide and is being premiered at Shanghai.

Industry News

  • News Corporation acquires 30% stake in TV, Riga, Latvia.
  • Jeff Bewkes became President and CEO of Time Warner at D6.
  • Disney Channel to be available for free in Spain.
  • “The British Board of Film classification launched a voluntary online rating scheme, extending its established rating a label such as U, 15, 18 to digital downloads and video games.” (Jamima Kiss, 2008).

Future Expectations

Disney’s new house of expectation set to open in spring this year. It will look like normal suburban home outside, but inside will be equipped with latest cutting edge hard ware and soft ware technologies.

References

The Walt Disney Company, Company History, Web.

Annual Report 2007, Web.

Yahoo.com. Industry: Entertainment Diversified, Revenue Growth, Web.

Investing for Beginners, Operating Profit Margin, About.com, 2008. Web.

Finance Scholar.com, Net profit margin, 2008. Web.

Financial Management, Return on Assets (ROA) Ratio, Web.

Investopedia, Return on Equity (ROE), 2008. Web.

LSE, Capital Gearing Definition, 2008. Web.

Company History, The Walt Disney, Web.

CEO’s Letter to Shareholders, Annual Return 2007, page 2, Web.

Executive Compensation Philosophy, The Walt Disney Company, Web.

Christopher Krikman, Yale School of Management, Web.

Manage The Executive Fast Track, Return on Capital Employed, Web.

Jamima Kiss, BBFC rating go online, 2008. Web.