By Ryan Barnes. Edited by Douglas A. McIntyre
Disney Corporation (DIS) $39
It is an exercise in irony to conduct a breakup analysis on Disney now, when they are finally executing on their strategy after years of internal strife and an embarrassing $67 billion buyout offer from Comcast less than three years ago. The likelihood of an actual division of property is very remote, but with Disney having so many discernable businesses its worth looking at what the current stock valuation is actually based on.
Media/Broadcasting – ABC is tops in the ratings again after a while it seemed like they were doomed for the #3 or #4 spot. This only proves that it’s a very cyclical business, and fortunes will change again in time. This earnings volatility will keep a valuation of the broadcasting on the low end of market ranges. The ESPN brand is a fantastic one, and has been valued by several independent sources as worth $20b or more. In this segment are dozens of cable channels, radio stations, and some distribution assets, but the real drivers of value remain the ABC/ESPN duo. Market multiples vary for radio versus cable versus network, but most range in the mid-teens. We’ll use a multiple of 14x operating income, conservative considering the growth rates at ESPN and ABC improvement. This values the Media segment at just over $50 billion.
Studio Entertainment – This segment is much-improved as well, even without the addition of Pixar (and a new largest shareholder in Steve Jobs) last year. Taking the value of Pixar at cost and applying an industry multiple of 11x earnings for the rest of the segment, studio entertainment could be worth north of $15 billion without breaking a sweat.
Parks and Resorts – This segment had always been the easy target for breakup enthusiasts; a low margin business that had stable cash flows but little upside and high capital costs. It’s not so easy to make that case anymore, as operating margins have improved almost 4 full percentage points in a short time, and currently stand above 15%. Not bad for the stodgy cash cow, and with new properties in Hong Kong and Europe the segment actually showed over 30% earnings growth in 2006. We’ll apply a multiple of 12x operating earnings to arrive at a value of about $18 billion.
The small but profitable Consumer Products division we’ll give a 6x multiple, adding another $3 billion and change. But what about the content library and the future licensing power – the intangibles of the “Disney” brand? These things are extremely difficult to value, but after netting out current assets and subtracting LT debt, we have already extracted over $39 per share of value. So whatever value the intangibles have, it is all upside to our conservative operating earnings model.
Ryan Barnes
Ryan Barnes has over 10 years’ experience in portfolio management and investment research, covering equities, fixed income, and derivative products. Ryan spent the past 5 years working as an institutional trader & manager for high-net worth investors, working with Merrill Lynch, Charles Schwab, Morgan Stanley, and many others. Ryan is currently working as a writer and financial modeling consultant on hedging and capital appreciation strategies, and does not own securities in the companies being covered.
Jon Ogg’s comments:
There is no doubt many "areas"that would
potentially have some hidden values such as the Cruiseship and other
properties that have a potential of being worth more than they are carried
for on the balance sheets. The average analyst target on DIS is roughly
$38.00, so the break-up value may actually be north of where Wall St. values it today.
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