8 February 2017

Todd Juenger

U.S. Media

+1-212-823-3157
todd.juenger@bernstein.com

Walt Disney Co

Jason Park

+1-212-823-3177
jason.park@bernstein.com

Rating

Market-Perform

Nataliya Nedzhvetskaya

Target Price

DIS

+1-212-823-2795
nataliya.nedzhvetskaya@bernstein.com

107.00 USD

Disney FQ117: Don't stop thinking about tomorrow
The Disney FQ1 report was striking in its consistency: every segment (ex-Studio) missed
consensus revenue and every segment (ex-Cons Prod's) beat consensus OI. We expect the
market will put more weight on the revenue misses than the OI beats.

Close Date

The all-important cable affiliate fee growth rate was sequentially flat. This is either good news
("it's not getting worse, and the future will get better with DMVPD launches") or bad news
("last quarter the CEO said the skinny bundle migration was abating, meaning we should have
seen sequential acceleration (we didn't), and the future DMVPD launches aren't/won't attract
net new subs"). The CEO reiterated his optimism for DMVPD launches and other DTC options
for Disney – but that is all future hope, not current reality.

Upside/(Downside)

Just when you thought Parks margins couldn't possible get any higher, they did, despite
declining domestic attendance (some due to prior yr events/weather/calendar, some due to
prioritizing yield/margin over volume). Another potential macro tailwind lurks, in the form of
higher discount rates lowering pension expense. We estimate 100bps rise in rates, all else
equal, would expand Parks margins by ~50bps, total company margins ~40bps (and Disney is
barely levered, to boot).

Market Cap (USD) (M)

172,638

EV (USD) (M)

178,795

Management mentioned the word "disruption" over and over again. We agree, and we also
agree Disney has more tools and options than probably any other media company to weather
the disruption. But it will be very choppy even in success, and we still cannot envision an
outcome where 10's of mm's of hh's who don't care about sports continue to pay for ESPN.

109.00

Target Price (USD)

107.00

SPX

F16A

F17E

F18E

5.72

5.85

6.76

116.98

130.48

146.38

Financials

86.25

52-Week High

111.99

SPX

2,293.08

FYE

Sep

Indicated Div Yield

1.4%

Performance

YTD

1M

6M

12M

Absolute (%)

4.6

0.0

13.7

16.1

SPX (%)

2.4

0.7

5.0

22.0

Relative (%)

2.2

(0.7)

8.7

(5.9)

Bernstein
Events

Analyst Page
Company
Page

We rate DIS Market-Perform, Target Price $107. We believe the Parks, Studios, and
Consumer Products have strong earnings power, durability, and ROIC. However, almost 50%
of NI comes from media networks, and ESPN is especially vulnerable to cord-cutting/shaving.
EPS Adjusted

(2)%

52-Week Low

Investment Implications

DIS (USD)

7-Feb-2017

DIS Close Price (USD)

F16A

F17E

F18E

CAGR

Valuation Metrics

F16A

F17E

F18E

Operating Earnings (M)

15,128

14,977

16,690

5.0%

REL P/E Adjusted (x)

0.97

1.06

1.03

EBITDA (M)

16,763

16,782

18,631

5.4%

PEG Adjusted (x)

1.71

8.77

1.03

30.13

29.19

29.99

10.67

10.65

9.60

0.00

1.10

1.10

Div Yield (%)

1.30

1.49

1.67

FCF Yield (%)

4.72

5.58

6.48

EBITDA Margin (%)
Net Debt/EBITDA (x)

See Disclosure Appendix of this report for important disclosures and analyst certifications

EV/EBITDA (x)
NA

www.bernsteinresearch.com

 Todd Juenger +1-212-823-3157 todd.juenger@bernstein.com

8 February 2017

DETAILS
» A full line-item schedule of quarterly results versus consensus and SCB forecast and C3 audience deliveries are provided in
Exhibit 1-Exhibit 3.
» Decomposition of global affiliate fee growth is in Exhibit 4.
o

Rates +7%, Subs -2%, FX -1%, total +4%. Management characterized as "unchanged" from prior sequential
periods, which we agree with, despite the fact last quarter's total was +3%. Just rounding differences to
nearest integers.

o

The quarterly pace has actually been quite stable ever since Disney began disclosing this decomposition, with
only rounding differences (which often cancel each other out).

» So is "unchanged" good or bad for the stock?
o

Our dispassionate logic would say it should be "bad", because the market put so much weight on last quarter's
management comments claiming some abatement of the migration to skinny bundles among traditional pay-tv
subs. Which means, the domestic affiliate fee growth rate should have improved sequentially in this quarter
(and it didn't), so that should be bad.

o

On the other hand, our pragmatic logic recognizes that, in our observation, media investors, especially Disney
investors, are increasingly more selectively paying more attention to the positive datapoints (and "hope") than
the negatives. The party line from the media companies is the DMVPDs will attract net new subscribers into the
system, and in our observation, that has become the consensus line of thinking among media investors as well.
ß

o

Additionally, optimists may choose to interpret the rounding difference from +3% to +4% (global) as
meaningful, since it works in their favor. (as opposed to bulls on Fox, who were more inclined to brush
off the rounding difference of +8% down to +7% (domestic) as insignificant, since it worked against
them. Our view is both are insignificant.

Therefore, a narrative of: "things are stable, not getting worse, and DMVPDs are on the way to save the day" may
ultimately prevail when the dust settles. Despite the fact that last quarter, investors were pointing to expected
signs of acceleration in this quarter.

» Domestic attendance continues to decline at Parks, although most can be rightfully blamed this quarter on prior year events
th
(60 Anniversary), weather (Hurricane Matthew), and calendar (holiday timing wrt calendar quarters). However, we still
don't believe attendance is growing on an underlying, "organic" basis.
o

We believe much of this is by choice. Disney has tested elasticity of demand and found they stand to make more
money (price x quantity) by raising prices, and suffering the associated small declines in attendance. The
financial equation works out in their favor.
ß

o

It also has benefits for the guest experience, who enjoy a slightly less crowded park.

However, the harder pricing is pushed, the more fragile it becomes in a cycle.

» Largely as a result of the pricing/yield focus, Park margins hit an all-time high in the quarter (as far as we can tell) of 24%.

U.S. MEDIA

o

One would usually worry – and to be clear, we do -- when: attendance is declining, margins are at an all-time
high, and the capital cycle seems more likely to accelerate than decelerate. (Not to mention the Zika virus is in
Florida and Orlando is a swamp).

o

But, there is another potential margin tailwind that seems likely to make some degree of additional expense
reduction/margin contribution – pension expenses. Discount rates rise, pension P&L expense comes down.
Post-election, rates have already risen and many believe there is more to come.

BERNSTEIN

2

 Todd Juenger +1-212-823-3157 todd.juenger@bernstein.com

8 February 2017

1

o

We don't claim to be pension accounting experts , but fortunately Disney was kind enough to provide exactly
the sensitivity we wanted in their 10-K: for every 100bps increase in discount rate, pension liability goes down
by $2.4bn and annual pension expense goes down by $235mm.

o

A quick-and-dirty analysis shows that relative to our existing (pre-quarter) FY17 forecast, all else equal, a
2
100bps increase in discount rate would increase Parks margins by ~50bps and consolidated margins by
~40bps (Exhibit 5).

o

For reference, total company pension expense for FY17 was only $319mm. So it wouldn't take a very big
increase in discount rate to wipe out pension expense entirely. We are working with the company to verify (and
nothing is ever simple with pension accounting), but the point is, if rates rise, there won't much pension expense
hitting the P&L at all. (And, barely levered, Disney doesn't have much interest expense risk, either).

» Consumer Products missed sell-side expectations (badly) for the fifth quarter in a row.
o

1
2

Going forward, the question is: will sell-side numbers come down, or will growth pick back up? Based on what
we heard on the conference call, we think the sell-side largely bought into a re-acceleration in 2H FY17, based
on the movie slate and easier comps.

Or even pension accounting neophytes.
40% of pension expenses are mapped to Parks.

U.S. MEDIA

BERNSTEIN

3

 Todd Juenger +1-212-823-3157 todd.juenger@bernstein.com

8 February 2017

EXHIBIT 1: Disney FQ1 Earnings Results
($ in millions)

FQ1
2016

FQ1
2017

Y/Y %

Cons.

Media Networks
Parks & Resorts
Studio Entertainment
Consumer Products
Interactive Media
Total Net Revenue

$6,332
4,281
2,721
1,910

$6,233
4,555
2,520
1,476

$15,244

$14,784

(2%)
6%
(7%)
(23%)
n/a
(3%)

Operating Expenses (ex D&A)
Depreciation and Amortization
Equity Earnings (Gain) Loss
Restructuring and Impairment
Operating Income (Loss)

$10,648
607
(474)
81
$4,382

$10,391
687
(118)
0
$3,824

(2%)
13%
(75%)
na
(13%)

$3,811

Other Items-net
Interest Expense, net
Earnings before tax

0
(24)
$4,358

0
(99)
$3,725

na
313%
(15%)

(100)
$3,111

Provision for Income Tax
Minority Interest (After Tax)
Reported Net Income (Loss)

(1,448)
(30)
$2,880

(1,237)
(9)
$2,479

(15%)
(70%)
(14%)

(1,242)
501
$2,370

$1.73

$1.55

(10%)

$1.50

$2,712
$1.63
1,668

$2,488
$1.55
1,609

(8%)
(5%)
(4%)

$1,412
22%
$981
23%
$1,014
37%
$860
45%
$4,267
28%

$1,362
22%
$1,110
24%
$842
33%
$642
43%
$3,956
27%

(4%)
(45)
13%
145
(17%)
(385)
(25%)
(153)
(7%)
(123)

Diluted Earnings per Share - GAAP
Adjusted Metrics
Net Income
Diluted EPS
Share Count

FQ1 2017 Estimates
Actual vs.
Bernstein

Actual vs.

$6,421
4,587
2,519
1,749

(3%)
(1%)
0%
(16%)

$6,406
4,740
2,538
1,739

(3%)
(4%)
(1%)
(15%)

$15,265

(3%)

$15,423

(4%)

0%

$11,115
$643
($149)
$10
$3,805

7%
(6%)
26%
na
0%

20%

$0
($96)
$3,709

na
(3%)
0%

5%

($1,248)
($53)
$2,408

(1%)
(83%)
3%

3%

$1.51

3%

$2,370
$1.50
1,580

5%
3%
2%

$2,415
$1.51
1,598

3%
2%
1%

$1,317
21%
$1,040
23%
$832
33%
$703
40%
$3,892
25%

3%
134
7%
170
1%
38
(9%)
330
2%
126

$1,184
18%
$1,133
24%
$968
38%
$682
39%
$3,966
26%

15%
338
(2%)
47
(13%)
(473)
(6%)
429
(0%)
104

Segment Operating Income and Margin
Media Networks
OI Margin %
Parks & Resorts
OI Margin %
Studio Entertainment
OI Margin %
Consumer Products
OI Margin %
Total Segment OI
OI Margin %

Source: Factset, StreetAccount consensus, Company reports, Bernstein estimates and analysis

Note: StreetAccount consensus used for segment revenue (excluding eliminations) and OI estimates only. Factset estimates are used elsewhere.

U.S. MEDIA

BERNSTEIN

4

 Todd Juenger +1-212-823-3157 todd.juenger@bernstein.com

8 February 2017

EXHIBIT 2: DIS Segment Detail
($ in millions)

FQ1
2016

FQ1
2017

Y/Y %

Media Networks
Affiliate Fees
Advertising
Other
Total

$2,960
2,619
753
$6,332

$3,075
2,529
629
$6,233

4%
(3%)
(16%)
(2%)

Parks & Resorts
Domestic
International
Total

$3,674
607
$4,281

$3,740
815
$4,555

2%
34%
6%

Studio Entertainment
Theatrical
Home Entertainment
TV Distribution & Other
Total

$1,017
722
982
$2,721

$961
547
1,012
$2,520

(6%)
(24%)
3%
(7%)

Consumer Products
Licensing & publishing
Retail & other
Total

$1,300
610
$1,910

$936
540
$1,476

(28%)
(11%)
(23%)

Source: Company reports, Bernstein estimates and analysis

EXHIBIT 3: Disney CQ4 Ratings Summary
Oct-16

Demograhic Ratings
Nov-16 Dec-16 Q4 2016

ABC Family
ESPN2
ESPN

(9%)
(21%)
(17%)

(17%)
(9%)
(15%)

(29%)
(9%)
(12%)

Non-Kids Ex-Soapnet

(17%)

(16%)

Disney XD

(28%)

(35%)

Total Disney Cable (C3) Ex-Soapnet
(18%)

(17%)

Oct-16

Household Ratings
Nov-16
Dec-16
(17%)
(19%)
(12%)

Oct-16

(25%)
(21%)
(11%)

(20%)
(22%)
(14%)

(10%)
(26%)
(16%)

(19%)
(16%)
(10%)

(27%)
(24%)
(11%)

(10%)
(27%)
(18%)

(20%)

(18%)

(17%)

(14%)

(17%)

(16%)

(17%)

(14%)

(19%)

(16%)

(24%)

(29%)

(18%)

(27%)

(16%)

(21%)

(17%)

(24%)

(15%)

(19%)

(21%)

(18%)

(18%)

(16%)

(18%)

(16%)

(17%)

(15%)

(19%)

(16%)

(8%)

(9%)

1%

(20%)
(11%)

(15%)

Q4 2016

(22%)
(13%)
(15%)

Disney Channel (L+SD)
ABC

P2+ Ratings
Nov-16
Dec-16

Q4 2016

(4%)

(11%)

(22%)
(9%)

(9%)

3%

(6%)

(22%)
(22%)
(13%)

(21%)
(6%)

Source: Nielsen, Bernstein estimates and analysis

EXHIBIT 4: Media Networks Cable Affiliate Fee Growth Reconciliation

Rate
FX
Subscribers
Total

FQ1
7%
2%
2%
4%

FQ2
6%
2%
1%
3%

FQ3
7%
1%
2%
4.5%

FQ4
6%*
1%
2%
3%

FQ1
7%
1%
2%
4%

* Organic rate ex-53rd week
Source: Company reports, Bernstein estimates and analysis

U.S. MEDIA

BERNSTEIN

5

 Todd Juenger +1-212-823-3157 todd.juenger@bernstein.com

8 February 2017

EXHIBIT 5: Effect on margins in a rising interest rate environment

Parks & Resorts
Pension expense benefit*
Parks & Resorts Post-Benefit

OI
3,661
94
3,755

Margins
19.6%

Consolidated OI
Pension expense benefit*
Consolidated OI Post-Benefit

15,028
235
15,263

26.4%

20.1%

26.8%

* 100bps increase in discount rate
Source: Company filings, Bernstein estimates and analysis

EXHIBIT 6: DIS Income Statement (Not Updated for Earnings)
DIS Income Statement
($ millions)
Revenues
Costs and expenses (as reported)
Less: D&A
Plus: Equity income
EBITDA
Margin %
Depreciation and Amortization
Restructuring and impairment
Operating income
Margin %
Net interest expense
Other (income) expense, net
Pre-tax income

FY-15E

FY-16

Q1-17E

Q2-17E

Q3-17E

Q4-17E

FY-17E

FY-18E

FY-19E

$52,465

$55,632

$15,423

$13,508

$14,659

$13,908

$57,499

$62,132

$63,666

39,241
(2,354)
814

41,274
(2,527)
926

11,757
(643)
149

9,986
(653)
158

10,731
(666)
160

10,632
(678)
158

43,105
(2,639)
624

$17,811
32%

$4,458
29%

$4,333
32%

$4,754
32%

$4,112
30%

$17,656
31%

$19,536
31%

$19,388
30%

2,354
53

2,527
156

643
10

653
10

666
10

678
10

2,639
40

2,806
40

2,983
40

$13,985
27%

$15,128
27%

$3,805
25%

$3,670
27%

$4,078
28%

$3,424
25%

$14,977
26%

$16,690
27%

$16,366
26%

117
0

260
0

96
0

104
0

107
0

102
0

410
0

429
0

452
0

$13,868

$14,868

$3,709

$3,566

$3,971

$3,322

$14,567

$16,261

$15,914

(5,016)

(5,078)

(1,248)

(1,200)

(1,329)

(1,111)

(4,887)

Net income

$8,852

$9,790

$2,461

$2,366

$2,642

$2,210

$9,680

Net income to Disney
Margin %

47,948
(2,983)
688

$16,392
31%

Income taxes
Less: NI to noncontrolling int.

46,057
(2,806)
655

(470)

(399)

(53)

(165)

(134)

(146)

(498)

(5,412)
$10,849

(5,282)
$10,632

(643)

(718)

$8,382
16%

$9,391
17%

$2,408
16%

$2,201
16%

$2,508
17%

$2,064
15%

$9,182
16%

$10,206
16%

$9,914
16%

Basic EPS attributable to Disney
Diluted EPS attributable to Disney

$4.95
$4.90

$5.76
$5.73

$1.52
$1.51

$1.40
$1.39

$1.61
$1.60

$1.34
$1.33

$5.86
$5.83

$6.79
$6.74

$6.87
$6.83

Shares outstanding, basic
Shares outstanding, diluted

1,694
1,709

1,629
1,639

1,589
1,598

1,574
1,583

1,559
1,568

1,544
1,553

1,566
1,575

1,504
1,513

1,443
1,452

Adjusted Inc.Statement Measures
Diluted EPS Excluding Items

$5.15

$5.72

$1.51

$1.40

$1.60

$1.33

2.1%
$5.85

15.7%
$6.76

1.2%
$6.85

01/31/17
$15,274
4,356
2,370
$1.49

$13,579
4,370
2,304
$1.43

$14,630
4,949
2,691
$1.70

$14,011
4,012
2,007
$1.29

$57,503
17,524
9,419
$5.92

$60,919
18,944
10,289
$6.68

$63,197
19,802
10,628
$7.25

Consensus Estimates as of
Revenue
EBITDA
Net Income
Pro Forma EPS (diluted)
Source: Factset, Company filings, Bernstein estimates and analysis

U.S. MEDIA

BERNSTEIN

6

 Todd Juenger +1-212-823-3157 todd.juenger@bernstein.com

8 February 2017

EXHIBIT 7: DIS Balance Sheet and Cash Flow Statement (Not Updated for Earnings)
DIS Balance Sheet
($ millions)
FY-15E

Q1-17E

Q2-17E

Q3-17E

Q4-17E

$4,610
9,065
1,390
1,208
693

$2,437
10,543
2,242
1,234
925

$1,619
9,445
1,589
1,081
810

$2,377
9,418
1,740
880
880

$2,922
9,774
1,454
1,278
733

$2,922
9,774
1,454
1,278
733

$3,978
10,795
1,627
1,389
797

$2,772
11,293
1,709
1,448
831

$16,758

$16,966

$17,382

$14,544

$15,293

$16,162

$16,162

$18,585

$18,053

6,183
2,643
25,179
34,998
2,421

6,339
4,280
27,349
34,759
2,340

6,139
4,280
27,655
34,786
3,702

6,199
4,280
27,848
34,812
3,255

6,241
4,280
28,093
34,839
3,591

6,325
4,280
28,286
34,865
2,574

6,325
4,280
28,286
34,865
2,574

6,835
4,280
29,068
34,974
2,797

7,003
4,280
29,682
35,088
2,916

$88,182

$92,033

$93,943

$90,939

$92,337

$92,493

$92,493

$96,538

$97,022

$7,844
4,563
3,927

$9,130
3,687
4,025

$9,309
500
4,319

$7,348
500
3,782

$7,423
500
4,105

$9,475
500
4,277

$9,475
500
4,277

$10,190
500
4,647

$10,564
500
4,845

$16,334

$16,842

$14,127

$11,630

$12,027

$14,251

$14,251

$15,337

$15,909

12,773
10,420

16,483
11,385

19,670
12,141

19,670
12,312

19,670
12,459

18,922
12,004

18,922
12,004

20,990
13,005

20,827
13,578

$39,527

$44,710

$45,938

$43,611

$44,156

$45,177

$45,177

$49,332

$50,314

44,525
4,130

43,265
4,058

43,911
4,094

43,198
4,129

44,044
4,137

43,172
4,144

43,172
4,144

43,103
4,103

42,672
4,037

Total equity

$48,655

$47,323

$48,005

$47,327

$48,181

$47,316

$47,316

$47,206

$46,708

Liabilities & Equity

$88,182

$92,033

$93,943

$90,939

$92,337

$92,493

$92,493

$96,538

$97,022

FY-15E

FY-16

Q1-17E

Q2-17E

Q3-17E

Q4-17E

FY-17E

FY-18E

FY-19E

$2,461
643
(2,812)
394

$2,366
653
49
140

$2,642
666
127
171

$2,210
678
2,373
122

$10,849
2,806
137
326

$10,632
2,983
(8)
667

$3,208

$3,606

$5,383

$12,883

$14,119

$14,274

Assets
Cash & equivalents
Accounts receivable
Inventories
Television Costs
Other current assets

$4,269
8,019
1,571
1,170
1,729

Total Current Assets
Film and Television Costs
Investments
PPE, net
Goodwill & intangibles
Other assets
Total Assets
Liabilities
AP & other Accrued
Short term debt
Unearned royalties and other
Current liabilities
Long term debt
Other LT liabilities
Total liabilities
Disney Shareholder's Equity
Noncontrolling interests

FY-16

FY-17E

FY-18E

FY-19E

DIS Cash Flow Statement
($ millions)
Operating Activities
Net income
Depreciation and amortization
Change in operating A&L, net of acq.
Other
Operating Cash Flow
Investing Activities
Capital Expenditures
Acquisitions
Other
Investing Cash Flow
Financing Activities
Change in debt
Dividends
Repurchases of common stock
Other
Financing Cash Flow

$8,852
2,354
129
(426)

$9,790
2,527
(902)
1,798

$9,680
2,639
(263)
828

$10,909

$13,213

$686

($4,265)
0
20
($4,245)

($4,773)
(850)
(135)
($5,758)

($901)
(75)
0
($976)

($797)
(75)
0
($872)

($863)
(75)
0
($938)

($822)
(75)
0
($897)

($3,382)
(300)
0
($3,682)

($3,396)
(300)
0
($3,696)

($3,411)
(300)
0
($3,711)

$2,705
(3,063)
(6,095)
329

$2,940
(2,313)
(7,499)
259

$0
0
(2,000)
81

$0
(1,269)
(2,000)
81

$0
0
(2,000)
81

($748)
(1,244)
(2,000)
45

($748)
(2,513)
(8,000)
287

$2,068
(2,709)
(9,000)
315

($163)
(2,887)
(9,000)
347

($6,124)

($6,613)

($1,919)

($3,189)

($1,919)

($3,947)

($10,975)

($9,326)

($11,702)

($2,209)

($853)

$749

$539

($1,774)

$1,096

($1,139)

$0
$0.00

$0
$0.00

$0
$0.00

$0
$0.00

$9,587
$6.09
5.5%

$10,681
$7.06
6.4%

$10,797
$7.44
6.7%

Cash Flow

$540

$842

FCF
FCF/Share
FCF Yield

$6,644
$3.89
3.5%

$8,440
$5.15
4.7%

Source: Factset, Company filings, Bernstein estimates and analysis

U.S. MEDIA

BERNSTEIN

7

 Todd Juenger +1-212-823-3157 todd.juenger@bernstein.com

8 February 2017

DISCLOSURE APPENDIX

TICKER TABLE
Ticker
DIS

Rating
M

7 Feb 2017
Closing
Price

Target
Price

TTM
Rel.
Perf.

109.00

107.00

(5.9)%

USD

SPX

2,293.08

EPS Adjusted

USD

EV/EBITDA

2016A

2017E

2018E

2016A

2017E

5.72

5.85

6.76

10.67

10.65

2018E
9.60

116.98

130.48

146.38

19.60

17.57

15.67

O - Outperform, M - Market-Perform, U - Underperform, N – Not Rated
FOXA base year is 2016.

VALUATION METHODOLOGY
U.S. Media
We value each of our coverage companies using the weighted average of a discounted cash flow analysis and a relative market
multiple valuation. For our relative multiple valuation for AMCX, CBS, DIS, DISCA, FOXA, SNI, TWX, VIAB, we apply our Q5-Q8
EBITDA estimate to a relative EV/EBITDA multiple selected based on past history, projected growth rates, and the company's
ability to generate returns in excess of the cost of capital, all relative to that of the S&P 500. For our relative multiple valuation
for LGF and NLSN, we apply our Q5-Q8 EPS earnings estimate to a relative PFE multiple selected based on past history,
projected growth rates, and the company's ability to generate returns in excess of the cost of capital, all relative to that of the
S&P 500. Our DCF valuations are conducted on a sum-of-the-parts basis for each major operating segment of our respective
coverage companies, with comparable company valuation benchmarks used when appropriate and available. Our DCF model is
based on annual cash flow forecasts over an explicit period, combined with a continuing value component intended to capture
the firm’s value into perpetuity. Our explicit period assumptions are based on annual projections for NOPLAT, depreciation,
capital expenditures, and working capital. The fair market value of common equity determined by each of these methods is
divided by the current diluted share count and multiplied by one plus the cost of equity minus the current dividend yield (1 + Ke d) to calculate a target share price in 12 months time.¬

We then weight the market multiple component of our valuation 50% and the DCF 50% in order to establish a weighted
average target price.

RISKS
U.S. Media
Consumer and advertising spend are significant drivers of revenue for most of the companies in our coverage. The deterioration
of economic conditions could have a material negative impact on revenues and earnings of the companies in our coverage and
on the stocks' achieving our target prices. The health and stability of the video distribution ecosystem is vitally important with
respect to the delivery of our companies' television content. New and innovative platforms that offer video distribution could
potentially disrupt the ecosystem, thereby jeopardizing the primary distribution partners (cable, satellite) of each of our
companies. Additionally, piracy of content could serve to undermine the profitability of a product that typically is produced with
the expectation of multiple distribution methods and time horizons for which that product can be monetized.
Walt Disney Co
Upside Risks to our Target Price:
The slate of capital projects may succeed in creating a return on investment commensurate with the alternative uses of capital,
such as share buybacks or dividends, which could create additional upside should the market realize this.

U.S. MEDIA

BERNSTEIN

8

 Todd Juenger +1-212-823-3157 todd.juenger@bernstein.com

8 February 2017

The TV and Film Production units may produce future franchise hits, which would positively impact profitability across all
business lines.
Any unexpected positive news or events pertaining to the Parks and Resorts division may decrease perceived risk in past capital
projects and may materially contribute to the firm's profitability.
Downside Risks to our Target Price:
Disney may be unable to continue its pace of affiliate fee increases at its cable networks due to financial constraints on the parts
of buyers or increased regulatory oversight.
The slate of capital projects may fail to create a return on investment commensurate with the alternative uses of capital, such as
share buybacks or dividends, or the market may fail to realize the value of these investments for a period longer than we
anticipate.
The TV and Film production units may fail to deliver content that either succeeds on its own merit, or can be exploited through
Disney's Consumer Products, Parks and Resorts and Interactive Media divisions.
Any negativity surrounding the Disney brand would resonate throughout all business lines.

U.S. MEDIA

BERNSTEIN

9

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12-Month Rating History as of 02/07/2017
Ticker Rating Changes
DIS

M (RC) 08/20/15

Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated
Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change

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 exc usive use of TOM ROGERS at TIVO on 25-Apr-2017

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