Introduction:

I did a DCF during Bob Chapek's reign and now during Bob Iger's reign, I think DIS is a lemon not because of how badly the company is ran but rather the industry that DIS is in. In this new DCF, I gave my opinion on certain arms of the business and even made assumptions that DIS will pivot fast enough into greener pastures. But even that didn't save the value of this company. Not to mention, this company utterly sucks at reporting their financials so a fair bit of simplifying assumptions had to be made. I've linked my old DCF if you'd like to read it but I'll tear apart why my old DCF was wrong in the end. Old DCF: (SOURCE)

REVENUE:

DMED (%REV)

The emphasis on DMED will eventually fade away, linear network seems to be phasing out in popularity as it’s mainly being held up by Gen X and Baby Boomers (SOURCE), The average life expectancy is 72 years (SOURCE). So DIS will pivot away from Linear Network, as evident by management's heavy emphasis on DIS+ especially during conference calls. “About 50% of this demographic is expected to cut the cord by 2025” (SOURCE). So I’m assuming it has a half life of about 3 years. But, given Linear Network contributes 25% of Revenue in FY22 it may not drop to a very large extent so I’m assuming it plateaus at about 23%.

DMED (Y/Y)

Given how volatile to changes DMED is for the duration of my forecast, I used a historic number when forecasting DMED. Believing that 2022’s Linear TV trend will continue.

DPEP (%REV)

DPEP will plateau at a level slightly below pre disney+ levels of 2017 and 2018, as Disney+ begins taking up larger portions of the revenue.

DPEP (Y/Y)

The largest 4 theme parks in the US and UK had an average CAGR of 4.93% for the last 10 years. (SOURCE). However, with the advent of more entertainment and more addictive kind e.g. Tiktok or VR, I’d say this trend is unlikely to continue for the next 10 years. The growth tend downwards.

DTC (%REV)

DTC will begin taking up a larger portion of its revenue as it takes over some of the role played by linear network and as DTC has a much wider reach than Linear Network e.g. Able to reach mobile phones instead of being fixed on television, very valuable in countries where television is expensive (See success of NFLX in APAC). DTC makes portions of Linear Network obsolete.

DTC (Y/Y)

Management has stated its goal is to make DTC profitable by end 2024, I project that it will reach this goal. I’ve done the calculation and DTC will maintain this pace in accordance with the pace that NFLX is growing at as well, given that the streaming industry is an oligopoly one.

REVENUE MODEL: [SOURCE]

COST:

COST OF SERVICES

Most of disney services have variable costs e.g. Theme Parks having to expand more to take on higher capacity or DTC having to pay more for bandwidth as more customers subscribe, and DIS has to constantly maintain production in order to remain attractive for existing subscribers.

COST OF PRODUCTS

As DIS gets more popular, they produce more merchandise in bulk which could lead to economies of scale. So the cost of products falls over time.

SG&A

Utilities are a variable cost, whereas rent is a fixed cost so increasing capacity has higher marginal benefit. I’d argue that SG&A falls slightly over time as DIS approaches its capacity limits.

COST MODEL: [SOURCE]

COST OF CAPITAL:

COST OF DEBT

RFR (3M Average) = 3.53%

Risk Spread = 1.62% (SOURCE, Bond Rating A-)

COD = 5.15%

Marginal Tax Rate = 21%

AT-COD = 4.0685%

COST OF EQUITY

Market Beta = 1.04 (SOURCE)

Market Price(3M Average) = $97.11

Shares O/S = 1823M

MV Equity = 177032M

4105.02 = [4.58% x 4105.02] x (1+5%) / (1+R) + ([4.58% x 4105.02] x (1+5%)) x (1+3.417%) / R - 3.417% / (1+R) ^2

R = 8.635%

RFR (US) = 3.417%

ERP = 5.218%

COE = 8.96%

WEIGHTAGE

(SOURCE) Thereafter taken to be 10 Years.

PV Operating Lease Liability = 3626M

For debt there was no debt breakdown so I took BV Debt as the best estimate of Liability.

Total Liability = 51995M

%Equity = 77.3%

%Liability = 22.7%

WACC = 7.85%

Conclusion:

I've valued DIS at $69.38. With so much of their revenue in an outdated system, it's like a time bomb waiting to go off. What's worse is that most of DIS' cost are variable cost which means that they increase as o/p increases so margins are more or less fixed in place. It's hard for me to see how DIS could potentially dig themselves out of this. The plus side is that they are generating positive cash flow so hope is definitely there.

Now, my old DCF is inaccurate because I did not capitalize content acquisition costs so that did not accurately reflect the nature of content acquisition. In perpetuity, I'm assuming that D&A > CapEX which is impossible as you can't depreciate more than the par value of a PP&E. I've just done the math but for my terminal year to hold I need to earn a ROE of 522%, beyond ridiculous. Terminal Year Y/Y is at 8% which is significantly beyond TGR.

NEW DCF: [SOURCE]