Question: The Walt Disney Company is a diversified
The Walt Disney Company is a diversified worldwide entertainment company with operations in four business segments: media networks, parks and resorts, studio entertainment and consumer products. The media networks segment consists of the company's television (ABC, ESPN, and Discovery) and radio networks, cable/satellite and international broadcast operations, production and distribution of television programming, and Internet operations. The studio entertainment segment produces live-action and animated motion pictures, television animation programs, musical recordings and live stage plays. The consumer products segment licenses the company's characters and other intellectual property to manufacturers, retailers, show promoters and publishers. Disney parks and resorts are at the cornerstone of a carefully integrated entertainment marketing strategy. Through the parks and resorts segment, Walt Disney owns and operates four destination resorts in the United States, Japan and France. In the United States, kids flock to Disneyland, California, and Walt Disney World, Florida--an immense entertainment center that includes the Animal Kingdom, Magic Kingdom, Epcot Center, and Disney-MGM Studios. During recent years, the company has extended its amusement park business to foreign soil with Tokyo Disneyland and Euro Disneyland, located just outside of Paris, France. Work is underway on a fifth resort, Hong Kong Disneyland, scheduled to open in late 2005 or early 2006. Disney's foreign operations provide an interesting example of the company's shrewd combination of marketing and financial skills. To conserve scarce capital resources, Disney was able to entice foreign investors to put up 100% of the financing required for both the Tokyo and Paris facilities. In turn, Disney is responsible for the design and management of both operations, retains an important equity interest, and enjoys significant royalties on all gross revenues. Disney is also a major force in the movie picture production business with Buena Vista, Touchstone, and Hollywood Pictures, in addition to the renowned Walt Disney Studios. The company is famous for recent hit movies such as Finding Nemo, The Lion King, Pirates of the Caribbean: The Curse of the Black Pearl, and The Sixth Sense, in addition to a film library including hundreds of movie classics like Fantasia, Snow White, and Mary Poppins, among others. Disney employs an aggressive and highly successful video marketing strategy for new films and re- releases from the company's extensive film library. The Disney Store, a chain of retail specialty shops, profits from the sale of movie tie-in merchandise, books, and recorded music. Also making a significant contribution to the bottom line are earnings from Disney’s television operations which include ABC, The Disney Channel, the Discovery Channel, and sports juggernaut ESPN, the Entertainment and Sports Programming Network. The company's family entertainment marketing strategy is so broad in its reach that Disney characters such as Mickey Mouse, Donald Duck, and Goofy have become an integral part of the American culture. Given its ability to turn whimsy into outstanding operating performance, the Walt Disney Company is one firm that doesn't mind being called a “Mickey Mouse Organization.†Table 6.7 shows a variety of accounting operating statistics, including revenues, cash flow, capital spending, dividends, earnings, book value, and year-end share prices for the Walt Disney Company during the 1980-2003 period. All data are expressed in dollars per share to illustrate how individual shareholders have benefitted from the company's growth. During this time frame, revenue per share grew at an annual rate of 14.5% per year, and earnings per share grew by 9.0% per year. These performance measures exceed industry and economy-wide norms. Disney employees, CEO Michael D. Eisner, and all stockholders profited greatly from the company's outstanding stock-price performance during the 1980's and 1990's, but have grown frustrated by stagnant results during recent years. Over the 1980-2003 period, Disney common stock exploded in price from $1.07 per share to $23.33, after adjusting for stock splits. This represents a 14.3% annual rate of return, and illustrates how Disney has been an above-average stock-market performer. However, the stock price has grown stagnant since 1996, and stockholders are getting restless. Given the many uncertainties faced by Disney and most major corporations, forecasts of operating performance are usually restricted to a fairly short time perspective. The Value Line Investment Survey, one of the most widely respected forecast services, focuses on a three- to five- year time horizon. For the 2007-09 period, Value Line forecasts Disney revenues of $18.10, cash flow of $2.25, earnings of $1.65, dividends of $0.21, capital spending of $0.45, and book value per share of $17.55. Actual results will vary, but these assumptions offer a fruitful basis for measuring the relative growth potential of Disney.
The most interesting economic statistic for Disney stockholders is the stock price during some future period, say 2007-09. In economic terms, stock prices represent the net present value of future cash flows, discounted at an appropriate risk-adjusted rate of return. To forecast Disney's stock price during the 2007-09 period, one might use any or all of the data in Table 6.7. Historical numbers for a recent period, like 1980-2003, represent a useful context for projecting future stock prices. For example, Fidelity's legendary mutual fund investor Peter Lynch argues that stock prices are largely determined by future earnings per share. Stock prices rise following an increase in earnings per share and plunge when earnings per share plummet. Sir John Templeton, the father of global stock market investing, focuses on book value per share. Templeton contends that future earnings are closely related to the book value of the firm, or accounting net worth. “Bargains†can be found when stock can be purchased in companies that sell in the marketplace at a significant discount to book value, or when book value per share is expected to rise dramatically. Both Lynch and Templeton have built a large following among investors who have profited mightily using their stock-market selection techniques. As an experiment, it will prove interesting to employ the data provided in Table 6.7 to estimate regression models that can be used to forecast the average common stock price for The Walt Disney Company over the 2007-09 period. A simple regression model over the 1980-2003 period where the Y-variable is the Disney year-end stock price and the X-variable is Disney’s earnings per share reads as follows (t-statistics in parentheses):
Pt = -$1.661 + $31.388EPSt, R2 = 86.8% (-1.13) (12.03)
Use this model to forecast Disney’s average stock price for the 2007-09 period using the Value Line estimate of Disney’s average earnings per share for 2007-09. Discuss this share-price forecast.
a. A simple regression model over the 1980-2003 period where the Y-variable is the Disney year-end stock price and the X-variable is Disney’s book value per share reads as follows (t-statistics in parentheses):
Pt = -$1.661 + $31.388EPSt, R2 = 6.8%
(-1.13) (12.03)
Use this model to forecast Disney’s average stock price for the 2007-09 period using the Value Line estimate of Disney’s average book value per share for 2007-09. Discuss this share-price forecast.
b. A multiple regression model over the 1980-2003 period where the Y-variable is the Disney year-end stock price and the X-variables are Disney’s earnings per share and book value per share reads as follows (t-statistics in parentheses):
Pt = $3.161 + $2.182BVt, R2 = 76.9%
(1.99) (8.57)
Use this model to forecast Disney’s average stock price for the 2007-09 period using the Value Line estimate of Disney’s average earnings per share and book value per share for 2007-09. Discuss this share-price forecast.
c. A multiple regression model over the 1980-2003 period where the y-variable is the Disney year-end stock price and x-variables include the accounting operating statistics shown in Table 6.7 reads as follows (t-statistics in parentheses):
Pt = -$1.112 + $21.777EPSt + $0.869BVt, R2 = 90.9% (-0.88) (5.66) (3.06)
Use this model and Value Line estimates to forecast Disney’s average stock price for the 2007-09 period using the Value Line estimate of Disney’s average earnings per share and book value per share for 2007-09. Discuss this share-price forecast.
d. A multiple regression model over the 1980-2003 period where the y-variable is the Disney year-end stock price and x-variables include the accounting operating statistics shown in Table 6.7 reads as follows (t-statistics in parentheses):
Use this model and Value Line estimates to forecast Disney’s average stock price for the 2007-09 period. Check The Value Line Investment Survey at www.valueline.com. How did these regression-based forecasts perform?
Transcribed Image Text:
P=-$2.453 + $2.377REV. + $0.822CF, + $13.603CAPX, + $17.706DIV, + $0.437EPS, - $1.665BV, R = 94.3% (-1.75) (1.46) (0.09) (2.84) (0.24) (0.03) (-0.94)
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