DIS
Disney (Walt) Company ? 26 January 2000
(Continued)
2
n Approaching an Inflection Point ? Raising
Rating, Price Objective and Estimates
We are raising our near-term rating on Disney from
Neutral to Accumulate with a new 12-month price
objective of $37 per share, upside of 12% from current
levels. There are a number of factors prompting us to
upgrade the stock at current levels.
There are more signs of at least a modest recovery in
Disney?s underlying performance. We believe investor
perception towards Disney will continue to become more
positive, in part due to these first signs of stabilizing to
improving operating results. In addition, in light of the
AOL Time Warner mega-merger and the implication for
companies with unique and distinctive content, such as
Disney, multiples for the handful of vertically integrated
media and entertainment companies is likely to rise..
We have maintained our view that despite the near-term
trough in operating results, Disney is, and will remain, a
preeminent media and entertainment franchise, flush with
world class assets, unique content creation capabilities and
depth in management (strengthened today with the
appointment of Bob Iger to President and COO, thereby
alleviating any succession issues). The core reason for our
Neutral stance centered on the lack of earnings visibility.
Thanks, in large part, to the sensational success of Who
Wants to Be a Millionaire in conjunction with the
increasingly robust advertising environment, across
virtually all media platforms, Disney?s Media Networks
segment (which encompasses both cable network and
broadcast properties) is quickly improving Disney?s
visibility of an earnings? recovery. While we note that
Media Networks? Q1 operating growth of 73% is not
sustainable throughout the remainder of FY00, we are
increasing our full year operating income and EPS
estimates on the heels of the exceptionally strong Q1
results.
We are introducing a 12 month price objective of $37 per
share, upside of 12% from current levels, based on a
blended target multiple of 15x estimated CY01 EBITDA.
Disney shares are currently trading at an EV/EBITDA of
15.4x and 13.6x CY00E and CY01E EBITDA,
respectively. We are raising our FY00 EPS estimate to
$0.73 from $0.68, reflecting the better than expected
results in FYQ1. Based on our revised EPS estimates
(excluding GO.com losses) for FY00 and FY01 of $0.75
and $0.90, Disney?s current P/E ratio is 45x and 37x, or
nearly twice the P/E multiple of the broader market.
We note that Disney has always maintained its premium
valuation relative to its peers, even in the midst of several
consecutive earnings downgrades. Furthermore, from a
growth standpoint, Disney is not among the faster growing
companies in the sector. We project operating income will
increase 11% in FY00 and 14% in FY01, which is slower
than Fox, Viacom, CBS and Seagram, all of which are
projected to enjoy faster EBITDA growth over the
foreseeable future. Despite the new Viacom (i.e. including
CBS), which trades at 19x CY01E EBITDA, both Fox and
Seagram trade at significant discounts to Disney, trading at
6x and 9.4x CY01E EBITDA, respectively.
n New Management Team
On the heels of the success of the ABC Network, Disney
appointed Bob Iger as President and COO of the company.
Iger was formerly Chairman of the ABC Group and most
recently President of Disney International. We believe this
is a critical appointment for Disney as it alleviates
succession issues regarding.
Disney also announced the formation of an executive
management team including Michael Eisner, Bob Iger,
Sandy Litvack, Tom Staggs, Peter Murphy (both newly
promoted Senior Executive Vice Presidents) and the
business unit operating heads. The new management
structure will help the company focus on its cost-cutting
initiatives and continue the turnaround of operating results.
n FYQ1 Review
Disney?s FYQ1 results were well ahead of expectations,
marked by robust growth in Media Networks and a
respectable performance from the Theme Park segment.
As expected, results were offset by continued sluggishness
in Creative Content, driven by declines in both Studio
Entertainment and Consumer Products.
Overall, operating income increased 9% to $1.12 billion
vs. $1.03 billion last year, well ahead of our $934 million
estimate.
EPS, excluding non-recurring items, increased 8% to $0.25
vs. $0.23 last year and was above our, and consensus $0.20
estimate on a revenue increase of 3% to $6.8 billion vs.
$6.6 billion last year.
n Divisional Highlights
The standout performer in the quarter was Media
Networks, with operating income increasing a robust
73% to $642 million vs. $371 million last year, well
above our $465 million estimate. Broadcasting operating
income increased a remarkable 120%. Both the ABC
network and Disney?s owned and operated television
station group benefited from the stronger than expected
advertising market, as well as the incredible success of
Who Wants to be a Millionaire, which Disney is exploiting
beautifully and helped ABC maintain the top spot in
primetime rankings. Improved ratings at Good Morning
America and 20/20, as well as advertising revenue growth
at the radio stations also impacted results.
ESPN benefited from higher advertising revenues,
subscriber growth and rate increases. Similarly, subscriber
growth and a healthy cable advertising environment fueled
by results at Lifetime, The History Channel and E!
Entertainment Television. |
