Corporate finance project stock valuation the walt disney company

NATIONAL ECONOMICS UNIVERSITY SCHOOL OF ADVANCED EDUCATIONAL PROGRAMS CORPORATE FINANCE PROJECT STOCK VALUATION The Walt Disney Company Lecturer: Prof Taewon Yang Advanced Finance 63C - Group Đỗ Phương Anh – 11210339 Phạm Thu Hương – 11217101 Nguyễn Mai Thảo Anh – 11215493 Nguyễn Thái Châu Anh – 11211030 Lê Phương Thảo – 11215382 Nguyễn Lê Lan Chi – 11219444 Trương Mỹ Anh - 11210799 Ngô Quỳnh Chi – 11211079 Nguyễn Thị Thùy Dương – 11211603 Ngô Phương Linh – 11213213 Trần Khánh Linh – 11213432 Phạm Thanh Phương – 11214875 Nguyễn Ngọc Quỳnh - 11215091 Nguyễn Thị Cẩm Vân – 11216199 Hanoi, 2023 TABLE OF CONTENTS A INTRODUCTION B STOCK VALUATION I Using D1/P0+ g to estimate the required rate of return II Using Constant Growth Model to estimate the stock price Definition of Constant Growth Model Estimating Disney’s stock price III Using Nonconstant Growth Model to estimate the stock price Definition of Nonconstant Growth model Estimating Disney’s stock price IV Using Price-to-Earnings ratio (P/E) or Price-to-Sales ratio (P/S) to estimate the stock price Price-to-Earnings Ratio (P/E) 1.1 Company’s own historical value 1.2 Industry average (Competitive companies) 1.3 Target stock price in one year Price-to-Sales Ratio (P/S) C CONCLUSION AND RECOMMENDATION I Recommendation II Conclusion REFERENCE 10 10 10 A INTRODUCTION The Walt Disney Company is one of the world's largest and most well-known entertainment and media conglomerates Founded in 1923 by Walt Disney and Roy O Disney, it has since grown into a global entertainment powerhouse The stock of The Walt Disney Company, listed on the New York Stock Exchange (NYSE) under the ticker symbol “DIS”, represents ownership in the company The history of the stock of The Walt Disney Company can be traced back to its initial public offering (IPO) on November 12, 1957 The IPO offered 155,000 shares of common stock at a price of $13.88 per share at that time Disney's stock has historically experienced periods of growth and faced challenges along the way Prior to the COVID-19 pandemic, the company was performing well, driven by the success of its film releases, theme parks, and media networks Walt Disney has endured a severe beating amid 2022's market downturn There are mounting signs that Disney has been struggling with its video-streaming service, which has become the centrepiece of CEO Bob Chapek's growth strategy since its launch almost two years ago During its latest earnings report, Chief Financial Officer Christine McCarthy cut the growth forecast for Disney+, saying it now expects a total range of 215 - 245 million subscribers by September 2024, down from the company's earlier forecast of 230 - 260 million subscribers Despite these challenges, it's hard to ignore the strength of Disney's global franchise and the cash-generation power of its legacy businesses The latest evidence of this strength came during the pandemic when the company's theme parks, movie theatres, and resorts faced unprecedented challenges due to global lockdowns and stay-at-home orders Now that the pandemic is behind us, Disney's cash machine is back on track, benefiting from strong pent-up demand Consequently, a large number of investors would wonder whether they should invest in this company As a solution to the mentioned issue, this analysis will elaborate on Disney’s stock valuation - an essential tool that can help investors make informed decisions about trading It values the fair market value of a financial instrument at a particular time, and its purpose is to predict the future price or potential market prices for the investors to time their sales or purchase of investments B STOCK VALUATION I Using D1/P0+ g to estimate the required rate of return The required rate of return has two components, which are the dividend yield and the capital gains yield The required rate of return represents the minimum return that investors expect to earn from an investment It is influenced by various factors such as the risk-free rate of return, the company's risk profile, and the investor's desired return for taking on that level of risk - Dividend yield: The dividend yield is calculated as the stock’s expected cash divided by its current price We observe Disney’s stock selling for $97.45 per share on September 29, 2022 The expected dividend will be $1.766 per share We have the dividend yield: 1.766 = 1.81% 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑦𝑖𝑒𝑙𝑑 = 97.45 - Capital gains yield: The capital gains yield is the dividend growth rate or the rate at which the value of an investment grows This table shows the dividend growth rate from 2017 to 2019 Year Dividend per share Dividend growth rate 2016 1.49 N/A 2017 1.62 8.72% 2018 1.72 6.17% 2019 1.76 4.07% Therefore, the average annual dividend growth rate is 6.32% We take this rate as g, the capital gains yield We can calculate Disney’s required rate of return: 𝑅 = 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑦𝑖𝑒𝑙𝑑 + 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑔𝑎𝑖𝑛𝑠 𝑦𝑖𝑒𝑙𝑑 = 1.81% + 6.32% = 8.13% The dividend yield on Disney is 1.81 percent, which was low compared to its average media peers Disney's low dividend yield could be attributed primarily to its stock appreciation and the company's emphasis on stock buybacks rather than dividends The difference between dividend yield and capital gains yield indicates that the increase in the company's stock price accounts for a significant portion of Disney's return This suggests that investors are expecting Disney's stock to appreciate over time and are willing to accept a lower dividend yield in exchange for potential capital gains Besides, a required rate of return of 8.13% shows the minimum return that investors expect from Disney to compensate for the risk and opportunity cost of capital 8.13 percent may be relatively high compared to lower-risk investments However, investors perceive Disney as an investment with relatively stable returns, as reflected in the positive dividend yield II Using Constant Growth Model to estimate the stock price Definition of Constant Growth Model The Constant Growth Model, also known as the Gordon Growth Model, is a valuation method that assumes a company's dividends per share (DPS) will grow at a constant rate indefinitely This model relies on three key inputs: DPS, the growth rate of DPS, and the required rate of return (RoR) for investors By using the Constant Growth Model, analysts can estimate the basic value of a company's stock based on the expected future dividends However, it's important to note that this model solely focuses on the impact of future dividends and overlooks other factors that can influence the market price of a stock Factors such as the introduction of new products, competition dynamics, and investor sentiment are not considered in this model One advantage of the Constant Growth Model is its flexibility in estimating stock prices at any given point in time, not just the present This means that by having the necessary inputs, including current dividends, expected growth rate, and the required rate of return, we can calculate the stock price at a specific future time In general, the price of the stock as of time "t" is given by the formula: 𝐷𝑡+1 𝑃𝑡 = 𝑅 − 𝑔 where: 𝑃𝑡 : Current stock price g: Constant growth rate expected for dividends in perpetuity R: Constant cost of equity capital for the company (or required rate of return) 𝑫𝒕 : Current value of dividends 𝐷𝑡+1: Value of next year's dividends If we assume that the dividend for a particular company always grows at a steady rate, we can determine the next dividend 𝐷𝑡+1 based on the dividend just paid 𝐷𝑡 The formula to estimate the next dividend is as follows: 𝐷𝑡+1 = 𝐷𝑡 × (1 + 𝑔) In this formula, 𝑫𝒕 represents the dividend just paid at time t, and (1+g) represents the growth factor applied to the current dividend to estimate the next dividend Estimating Disney’s stock price As calculated above, the average annual dividend growth rate is 6.32% and we take this rate as g, the constant dividend growth rate Its stock has a required rate of return of 8.13% and investors expect the dividend to grow at 6.32% in the future Year Expected Dividends per share Dividend growth rate 2023 1.88 6.32% 2024 2.00 6.32% 2025 2.13 6.32% Hence, we can calculate the price of a Walt Disney’s stock by the formula: 𝐷1 1.88 = $103.87 𝑃0 = = 𝑅 − 𝑔 8.13% − 6.32% Disney's performance as a dividend growth stock was impressive prior to the pandemic, with consistent increases in its payout under the leadership of CEO Bob Iger However, the suspension of its dividend in May 2020 has had a negative impact on the company's stock performance, causing it to underperform the overall market Looking ahead, Disney has announced its intention to reinstate the dividend and aim for a growing dividend by the end of 2023 If successful, this combination of earnings and dividend growth has the potential to drive Disney's stock to outperform over the long term Based on a constant growth rate prediction of 6.32%, which suggests that Disney will continue to grow its earnings and cash flows at a steady pace, the company's prospects appear promising A growth rate of this magnitude can be considered high, indicating that investors expect Disney to maintain strong growth in the future Importantly, a higher growth rate would lead to a lower discount rate, which in turn would result in a higher valuation for Disney's stock The discount rate reflects the level of confidence investors have in the company's ability to generate future cash flows When investors are more confident, they are willing to pay a higher price for the stock, as they believe it offers greater potential for returns Therefore, if Disney can continue to sustain its growth rate and demonstrate its ability to generate future cash flows, it stands a good chance of attracting investors who are willing to pay a premium for its stock This positive outlook could contribute to Disney's stock outperforming the market over time III Using Nonconstant Growth Model to estimate the stock price Definition of Nonconstant Growth model Nonconstant growth models assume the value will fluctuate over time The purpose of this growth model is to value a stock that is expected to have higher than normal growth in dividend payments for some period in the future After this supernormal growth, the dividend is expected to go back to normal with constant Document continues below Discover more from: Corporate finance 328 documents Go to course Test Bank for Fundamentals of Corporate Finance 10th 107 Edition by Ross Corporate finance 31 97% (66) Test Bank Fundamentals of Corporate Finance 12th edition Chapter Corporate finance 100% (17) TN1 corporate finance 38 Corporate finance 100% (12) Brooks Answers Introductory Econometrics for Finance 56 18 Corporate finance 94% (17) Corporate-Finance-Note-Chapter to Chapter 6, online note with full of useful information Corporate finance 100% (7) 148 Ebook Tài doanh nghiệp (Lý thuyết & thực hành quản lý ứng dụng cho doanh nghiệp Việt Nam)… growth In that case, we may calculate steady growth for those early years, then estimate 100% (7) Corporate finance upward or downward movement at whatever point necessary Supernormal growth is considered a regular part of an industry life cycle, particularly when there is great demand for a new product Many of the most successful companies in history have enjoyed supernormal growth at some point in their development Growth rates refer to the percentage change of a specific variable within a certain time period For investors, growth rates typically represent the compounded annualised rate of growth of a company's revenues, earnings, dividends, or even macro concepts, such as gross domestic product (GDP) and retail sales Estimating Disney’s stock price To avoid the problem of having to forecast and discount an infinite number of dividends, we assume that the dividend grows non constantly from 2022 to at the end of 2024 and starts growing at a constant rate in 2025 After the third year, the dividend will grow at a constant rate of 6.32% percent per year As we have calculated in part I, the dividend price per share has increased by 6.17% in 2018 and this index has grown by 2.33% in the next year According to that, the decrease of dividend growth rate is 62.24% from 2018 to 2019, so we apply this number to the following years In 2020, Disney announced that it would forgo the next cash dividend payment due to Covid-19 and the company has not resumed its dividend since then As a result, we assume net income as the dividends of the firm From this assumption, we can calculate the dividend per share of the company in 2021 and 2022 is 1.1 and 1.77 respectively Year Dividend per share 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 2021 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 2022 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠 = = 995 000 818 000 145 000 781 000 Dividend growth rate = 1.1 = 1.77 60.91% As can be seen from the table, from 2021 to 2022, the dividend has grown by 60.91% This table below shows the calculation of the expected dividend of Disney in the next three years Year Dividend per share The growth rate The decrease of growth rate 2022 1.77 60.91% 62.24% 2023 2.18 23% 62.24% 2024 2.37 8.68% 62.24% 2025 2.48 3.28% 62.24% Nonconstant growth Time 2022 Dividend Constant growth 2023 2024 2025 2.18 2.37 2.48 2026 According to the data above, we have the calculation: + 𝑔 + 0.0632 𝑃3 = 𝐷3 × = 2.48 × = 145.68 𝑅 − 𝑔 0.0813 − 0.0632 𝑃0 = = 𝐷1 + 1+𝑅 2.18 𝐷2 (1 + 𝑅)2 + 0.0813 + + 𝐷3 (1 + 𝑅)3 2.37 (1 + 0.0813)2 + + 𝑃3 (1 + 𝑅)3 2.48 (1 + 0.0813)3 + 145.6868 (1 + 0.0813)3 = 121.23 Thus, the current value of Disney’s stock is $121.23 per share In general, dividends per share grew year by year from 2019 to 2022, which indicates gradually better performance and financial status of the company throughout the period In the future, the expected dividend per share may increase annually, which means Disney is likely to perform well and pay higher dividends for stockholders In the stock market, high growth rates of dividends can raise the market value of the company’s stock It is clearly seen in the increase in the expected stock’s price of Disney from 2022 to 2025 Over the years preceding the pandemic, Disney's dividend yield ranged around 1.8%, which was low compared to its average media peers Disney's low dividend yield could be attributed primarily to its stock appreciation and the company's emphasis on stock buybacks rather than dividends They prefer generating shareholders’ returns through share buybacks rather than paying cash dividends since buybacks typically defer taxes for investors About Disney’s prospects in the following years on dividends, Disney enjoys a highly favourable position within media networks with its premier channels ESPN and ESPN2, which have exclusive deals with the National Football League The company's sports channels charge some of the highest fees among similar channels and generate some of the highest revenue streams from advertising The Disney Channel is also one of the most trusted channels among parents who subscribe to media content for their kids Yet, Disney's broadcasting business is continuing to see some softness as consumers drop cable subscriptions and switch to Internet TV offerings This development is likely to generate some headwinds for Disney and may slow down the company's growth in operating cash flows Disney is also generating an increasing amount of revenue from its characters by issuing franchising rights As the company diversified its characters and franchises by purchasing cartoon and movie studios, such as Pixar, Lucasfilm, and Marvel, Disney has been able to expand its portfolio of characters and appeal to a much broader audience Disney has also launched a Netflix (NFLX) competitor with Disney+ As the company continues creating movie hits and generating growing franchising sales, these revenue streams could offset any declines in Disney's broadcasting business and provide a sound foundation to restart its dividends Although management has reiterated its commitment to doing so, a date hasn't been announced IV Using Price-to-Earnings ratio (P/E) or Price-to-Sales ratio (P/S) to estimate the stock price In the case the company doesn’t pay dividends, we can make use of the PE ratio (as the ratio of a stock’s price per share to its earnings per share (EPS)) over the previous year The main idea is to have a benchmark or reference PE ratio, by which multiplied by earnings to come up with an estimated price The benchmark or reference PE ratio mentioned could come from several sources It could be based on similar companies (industry average or median), or it could be based on the company’s own historical values In this part, we will take both two methods into consideration Price-to-Earnings Ratio (P/E) 𝑃𝑟𝑖𝑐𝑒 𝑎𝑡 𝑇𝑖𝑚𝑒 𝑡 = 𝑃𝑡 = 𝐵𝑒𝑛𝑐ℎ𝑚𝑎𝑟𝑘 𝑃𝐸 𝑅𝑎𝑡𝑖𝑜 𝑥 𝐸𝑃𝑆𝑡 1.1 Company’s own historical value - From the company’s own historical value’s perspective, we would take the index trailing P/E, which equals to 39.42 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑖𝑛 2022 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 = 3,145,000 1,781,000 = 1.766 (the statistics taken from the previous report) → Estimated stock price in 2022 = 39.42 x 1.766 = $69.6 1.2 Industry average (Competitive companies) To calculate the reference P/E ratio based on similar companies, we calculate the average trailing P/E of major Walt Disney Company’s competitive companies: The Comcast Corporation, The Six Flags Entertainment Corporation, Netflix, AT&T and Hilton Worldwide Holdings Company Trailing P/E Comcast Corporation (CMCSA) 30.27 Six Flags Entertainment Corporation (SIX) 21.31 Netflix, Inc (NFLX) 44.72 AT&T, Inc (T) 19.23 Hilton Worldwide Holdings Inc (HLT) 30.40 Average P/E ratio 29.2 We can calculate the stock price in 2022: Stock price = 29.2 x 1.766 = $51.6 1.3 Target stock price in one year Walt Disney Corporation’s EPS is expected to grow by 27.2% per year The earnings per share next year: 𝐸𝑃𝑆1 = 𝐸𝑃𝑆0 × (1 + 𝑔) where g is the growth rate => 𝐸𝑃𝑆1 = 1.766 𝑥 (1 + 0.272) = 2.25 => 𝑃1 = 𝐵𝑒𝑛𝑐ℎ𝑚𝑎𝑟𝑘 𝑃𝐸 𝑅𝑎𝑡𝑖𝑜 𝑥 𝐸𝑃𝑆1 = 39.42 𝑥 2.25 = $88.7 So the target stock price in the following year will be $88.7 Price-to-Sales Ratio (P/S) 𝑃𝑟𝑖𝑐𝑒 𝑎𝑡 𝑇𝑖𝑚𝑒 𝑡 = 𝑃𝑡 = 𝐵𝑒𝑛𝑐ℎ𝑚𝑎𝑟𝑘 𝑝𝑟𝑖𝑐𝑒 − 𝑠𝑎𝑙𝑒𝑠 𝑟𝑎𝑡𝑖𝑜 𝑥 𝑆𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 There also exists a case that the companies both don’t pay dividends and are not yet profitable, meaning that earnings are negative In this case, the price-sales ratio is chosen to estimate the stock price Let’s assume that in 2022, neither did the Walt Disney Company pay the dividends nor made profits - Benchmark P/S ratio: 1.86 - 𝑆𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 = 82,722,000 1,781,000 = $46.45 Therefore, we have the estimated stock price in 2022: 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑠𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒 = 1.86 × 46.45 = $86.4 As it can be seen from the two parts above, the two methods result in two different answers Differences in the PE and PS ratios arise because investors have different perspectives when valuing a company While the PE ratio considers earnings, the PS ratio focuses solely on revenue Additionally, the PE ratio factors in the profitability and growth potential of a company, whereas the PS ratio reflects investors' sentiment towards a company's ability to generate sales It is essential to analyse a company from multiple angles, considering various financial metrics, to gain a comprehensive understanding of its valuation The PE ratio and PS ratio should be used in conjunction with other indicators and fundamental analysis to make informed investment decisions C CONCLUSION AND RECOMMENDATION I Recommendation There are several recommendations that can be given to Disney regarding the challenges in improving stock value Improve financial performance: Disney could focus on enhancing its revenue growth and profitability This might involve identifying areas of the business that are underperforming and implementing strategies to increase revenue or reduce costs Content and IP expansion: Disney's stock value is closely tied to its intellectual property (IP) and content offerings Expanding its content library and investing in new IPs can help attract and retain customers, drive subscription growth, and potentially increase stock value Digital transformation: Embracing digital technologies and expanding Disney's digital footprint can be crucial Strengthening the company's streaming services, investing in online advertising, and leveraging data analytics to personalise customer experiences can help drive growth and improve stock performance Investor communication: Disney can proactively engage with shareholders and potential investors to provide transparent and timely updates on its strategies, financial performance, and long-term vision Clear communication can help build trust and positively influence investor sentiment Competitive positioning: Continuously assessing the competitive landscape and staying ahead of industry trends is vital Disney should monitor emerging competitors, technological advancements, and consumer preferences to adapt its business strategies and maintain a competitive edge II Conclusion In conclusion, Disney’s stock valuation has shown positive signs over the period thanks to its strong brand and intellectual property Disney possesses one of the strongest brand portfolios in the entertainment industry, including iconic characters and franchises, such as Mickey Mouse, Marvel, Star Wars, and Pixar This strengthens their competitive advantage and growth potential Also, from the data given, it can be seen that Disney's diversified revenue streams come from various sources, including theme parks, media networks, film studios, and streaming services This diversification allows them to withstand market fluctuations and adapt to changing consumer preferences Last but not least, Disney has consistently demonstrated solid financial performance, with positive revenue growth and strong profitability margins Although there may be fluctuations due to external factors, the company's financial stability provides confidence to investors 10 REFERENCE Bellucco, A (n.d.) Multiples Approach Definition Investopedia Retrieved June 29, 2023, from https://www.investopedia.com/terms/m/multiplesapproach.asp Walt Disney (NYSE:DIS) Stock Forecast & Analyst Predictions (n.d.) Simply Wall St Retrieved June 29, 2023, from https://simplywall.st/stocks/us/media/nyse-dis/waltdisney/future Chen, J., & Anderson, S (n.d.) Dividend Growth Rate: Definition, How To Calculate, and Example Investopedia Retrieved June 29, 2023, from https://www.investopedia.com/terms/d/dividendgrowthrate.asp Mitchell, C (n.d.) Supernormal Growth Stock Definition and Example Investopedia Retrieved June 29, 2023, from https://www.investopedia.com/terms/s/supernormalgrowthstock.asp The Walt Disney Company (DIS) Income Statement (n.d.) Yahoo Finance Retrieved June 29, 2023, from https://finance.yahoo.com/quote/DIS/financials?p=DIS