(1) Read the attached Bloomberg Businessweek article about General Electric.(2) Complete the case study activity on Equity Valuations which requires the use of the Bloomberg terminal to complete an assignment. There areWeighted Average Cost of Capital (WACC) which requires the use of the Bloomberg terminal to investigate Disney’s WACC. There are 6 items required in this case. Items 1 – 5 will count 16 points each; Item 6 will count 20 points.There is link in the second file you must to see it to answer the Q
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equity_analysis_and_valuation__student_case__5_.pdf
equity_analysis_and_valuation_ge_article__2_.pdf
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CASE STUDY
EQUITY ANALYSIS & VALUATION
Understand and compare the theoretical equity valuation
methods to the more commonly-used multiple valuation
approach, and then apply these tools to value a company.
This supplement explores the reasoning behind and the
disadvantages of the three theoretical equity valuation
models—constant growth model, multi-stage growth model,
and dividend discount model—by comparing them to the
most frequently-used market multiple valuation approach
through the lens of General Electric (GE).
Subsequently, we will do the same valuations and
comparisons with The Walt Disney Company (Disney) for
homework.
Disney Segment Revenues and Operating Income
All Data from Fiscal Year 2017 in Millions, Except Percentages
Revenues
% of
Total
Operating
Income
% of
Total
18,415
33%
3,774
26%
Studio Entertainment
8,379
15%
2,355
16%
Consumer Products
4,833
9%
1,744
12%
Media Networks
23,510
43%
6,902
47%
Total
55,137
Parks and Resorts
14,755
Source: The Walt Disney Company Annual Report (10-K)
Materials
Disney Operating Margins by Segment and Consolidated
All Data from Fiscal Year 2017 in Millions, Except Percentages
40%
36%
35%
HOMEWORK CASE STUDY HANDOUT
The Case Study reinforces the class lesson.
25%
29%
28%
30%
25%
20%
20%
TERMINAL TUTORIAL VIDEO
A brief video explains how to gather equity data from the
Bloomberg terminal.
15%
10%
5%
0%
Web: https://vimeo.com/300775187/3a3918015e
Terminal: PLYR VOD 332919111
Parks and
Resorts
Case Study
Use the information below to guide your responses to
each question.
HOW DISNEY MAKES MONEY
Disney has four operating segments: parks and resorts,
studio entertainment, consumer products, and media
networks. The table below shows the proportion of Disney’s
total revenues and operating income that come from each
segment.
Studio
Entertainment
Consumer
Products
Media Networks
Disney
Consolidated
THINKING ABOUT VALUATION
Consider purchasing a house. The fundamental valuation
metric in a house purchase is square feet. A person
interested in purchasing a house should look at the listing
price per square foot and compare it to the price per square
foot of other houses that recently sold in the area. If the
current market for new homes is $112 per square foot and
the target home is listed at $124 per square foot, the target
home may be overvalued. Focus on the word may. It may
be that the target home is superior to the properties used as
comparables. Perhaps the target home is in a nicer
neighborhood or is built to a higher standard or has other
characteristics that warrant a premium to the comparable
properties. All of these characteristics need to be
considered. But the beginning point of any valuation is
uncovering the fundamental valuation metric of the asset,
which in the case of our real estate example, is square feet.
© Bloomberg L.P.
Equity Analysis and Valuation
Case Study
When valuing stock, the fundamental valuation metric
may be profit, cash flow, or dividends. These cash flows are
made to investors as a reward for their investment. Since
they are made after the asset has been purchased,
appropriate valuation techniques determine the present
value of these cash flows to uncover the intrinsic value of
the stock. Each of the four equity valuation metrics used in
this case arrive at the intrinsic value of Disney’s stock by
discounting the shareholder rewards (or returns) from the
dates they will be paid in the future to our decision point in
the present.
Page 2
Disney Divident Growth Rates
Annual Growth Rates in US Dollars, Including Average
Source: The Walt Disney Comapny Annual Report (10-K)
109%
110%
90%
70%
49%
50%
16%
30%
10%
15% 7%
Disney’s current stock price is $113.00 per share. The
average growth rate of the company’s dividend has been
16.09% from 2002 through 2017.
Disney’s return on equity is 19.5% and the company
retains approximately 75.7% of its profits while paying out
the remaining 24.3% in dividends.
23%
18%
12%
17%
10%
1%
0%
-10%
DISNEY’S NUMBERS
Use the following information on Disney to answer the case
questions.
22%
-1% -2%
-3%
-21%
-30%
02
03
04
05
06
07
08
09
10
11
12
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15
16
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The constant growth model also rests on a second
condition, that the denominator’s result of the expected
return minus the dividend growth rate must be a positive
number.
1
What is Disney stock’s intrinsic value using the
constant growth model?
The company’s stock currently trades at 16.27 times its
current year earnings estimate of $6.96 per share.
Analysts expect the company to earn $7.36 per share in
2019 and $8.24 in 2020.
Disney’s peers engaged in movie making trade at 19.6
times their current year earnings estimates while peers in
parks and resorts trade at 19.2; media and broadcasting at
17.0 and consumer products at 19.1.
THE 4 MODELS
Constant Growth Model
The constant growth model, also known as the Gordon
Growth Model, discounts future cash flows, or dividends,
under the assumption that a company’s dividends grow at a
constant rate forever. The intrinsic value of a company’s
equity is calculated by dividing a company’s dividend for
next year, labelled D1, by the difference between the stock’s
expected return, labelled k, and its dividend growth rate,
labelled g.
A primary weakness of the constant growth model is
that very few, if any, companies grow their dividends at a
constant growth rate. This central condition is unreasonable
and unlikely to ever be met by any company. The graph
below shows the dividend growth rates for The Walt Disney
Company since 2002. It is clear that there is nothing
constant about its dividend growth.
Multi-Stage Growth Model
The multi-stage growth model is designed to partially
remedy one of the constant growth model’s primary flaws,
that is, that no company grows its dividends at a constant
rate forever. The multi-stage model assumes that a
company’s dividends grow in two periods. The first is a
period of fast growth that lasts for a determined period of
time. The second is a period characterized by slower growth
that lasts forever. Technology companies exhibit fast growth
during their early years, followed by slower growth.
2
What is Disney stock’s intrinsic value using the
multi-stage growth model?
Discounted Dividend Model
There are three primary steps used to calculate a stock’s
intrinsic value using the discounted dividend model. First,
the dividends for future years must be calculated. Second,
the terminal value of the stock must be calculated. Third,
dividends are placed in a timeline using a spreadsheet or
calculator and the stock’s net present value is calculated.
© Bloomberg L.P.
Equity Analysis and Valuation
3
Case Study
Page 3
What is Disney stock’s intrinsic value using the
dividend discount model?
Market Multiples Approach
In the strictest terms, all the valuation models discussed up
to this point could be considered dividend discount models
since they attempt to find the present value of future cash
flows and/or dividends.
4
What is Disney stock’s intrinsic value using the
market multiple method?
5
Reconcile Disney stock’s intrinsic value,
considering the strengths and weaknesses of
each valuation approach.
6
While in front of the Bloomberg Terminal, watch
the tutorial video below and mimic the steps.
Then attach a screenshot of the GP function
screen comparing Disney to the S&P 500 from
January 1, 2018, to September 30, 2018.
Describe in one sentence if and how the
comparison has changed from what was shown
in the video.
TERMINAL TUTORIAL SCRIPT
The following Bloomberg instructions illustrate how to
gather the equity data on Disney. Use these directions as a
template or watch the accompanying video tutorial.
Web: https://vimeo.com/300775187/3a3918015e
Terminal: PLYR VOD 332919111
Log in to the Bloomberg terminal and type DIS, press the
F8 equity sector key, and then DES. Press the Enter or
key. This is the description page for The Walt Disney
Company. Here we can see key data such as the P/E ratio
(glow) and the estimated earnings per share (glow).
If we click on the Price Chart, we will go to the GP page
which shows us a line graph of the stock price for Disney.
Disney’s stock price is most interesting in comparison to an
equity benchmark, like the S&P 500 index. Let’s add a line
for the S&P 500, or SPX, onto this graph by clicking the
Chart Content button. In the amber field, start typing S&P
and choose from the autocomplete menu S&P 500 Index.
We can also adjust the date range to show data for the
calendar year 2017 and press Enter once the dates are set.
The chart shows that Disney and the S&P began 2017
moving roughly in tandem, but the S&P outperformed
Disney from mid-May to the end of the year.
If we wanted to build a model to value Disney’s stock
we need to gather some financial information. Let’s type
Financial Analysis in the command line and select FA from
the dropdown. All of Disney’s financial statements are
accessible in the folders of this page (glow). A company’s
dividends are often used to value its stock. Click on the I/S
tab to see Disney’s historical income statements.
Scroll toward the bottom of the screen and find
dividends per share. The numbers in amber are historical
while those in white are projections.
© Bloomberg L.P.
Equity Analysis and Valuation
Case Study
A company’s cost of equity, which can be used as the
expected return for its stock, can be found by typing WACC
in the command line for Weighted Average Cost of Capital
and pressing Enter or . Disney’s cost of equity is 9.8%
at the time of this recording in mid-November 2018. These
data points are all useful to value stock.
Page 4
THE BOTTOM LINE By applying the constant growth model,
multi-stage growth model, dividend discount model, and market
multiples approach to valuing a company, we can see that the
market multiples approach is most commonly used because it is
usually the most accurate.
Pressing the Menu key on your keyboard to explore a
collection of other functions with which you can perform
company analysis.
Use the instructions in this video to create a graph on the
GP screen of the Terminal, plotting Disney’s stock price
against that of the S&P 500 from January 1, 2018, to
September 30, 2018. Include a screenshot of your work and
describe in one sentence if and how the comparison has
changed from what was shown in the video.
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ANYWHERE, BLOOMBERG MARKETS, BLOOMBERG NEWS, BLOOMBERG PROFESSIONAL, BLOOMBERG TERMINAL and BLOOMBERG.COM. Absence of any trademark or service mark
from this list does not waive Bloomberg’s intellectual property rights in that name, mark or logo. All rights reserved.
Bloomberg Businessweek
THE HELL
IS
W
G
N
O
R
CREDITS CREDITS CREDITS
42
WHAT
February 5, 2018
CREDITS CREDITS CREDITS
WITH
GEN
ERA
L
E
L
E
C
T
R
43
IC
?
The astonishing mess
at an iconic American
company
By Drake Bennett
44
In the century following the Civil
War, a handful of technologies
revolutionized daily existence.
The lightbulb extended the day,
electric appliances eased domestic
drudgery, and power stations
made them all run. The jet engine
collapsed distance, as, in other
ways, did radio and television.
X-ray machines allowed doctors
to peer inside the body, vacuum
tubes became the brains of early
computers, and industrial plastics
found their way into everything. All
those technologies were either
invented or commercialized by
General Electric Co.
For most of its 126-year history,
GE has exemplified the fecundity
and might of corporate capitalism.
It manufactured consumer products
and industrial machinery, powered
commercial airliners and nuclear submarines, produced radar altimeters
and romantic comedies. It won Nobel
Prizes and helped win world wars. And
it did it all lucratively, rewarding investors through recessions, technological
disruption, and the late 20th century
collapse of American manufacturing.
That long, proud run may have
come to an end. It happened, as Ernest
Hemingway wrote of going bankrupt, “gradually and then suddenly.”
GE hasn’t inspired awe for some time
now: The company had to be bailed
out in 2008 by the federal government and Warren Buffett, and across
the 16-year tenure of recently departed
Chief Executive Officer Jeffrey Immelt
its stock was the worst performer in the
Dow Jones industrial average.
The past year, however, has seen
GE enter new territory. Since Donald
Trump’s election in November 2016,
during a stock market boom in which
the Dow is up 41 percent, GE has lost
46 percent of its value, or $120 billion.
A few months after Immelt retired as
chief executive last summer, the company shocked Wall Street by announcing earnings that were barely half of
analysts’ already lowered estimates.
Soon after, GE said it would halve
its once-s acrosanct stock dividend
because it was short on cash. It also
said it would sell or spin off $20 billion in businesses, including its lightbulb division. (The appliance business
was sold to the Chinese manufacturer
Haier Group in 2016, along with a
license to use the GE brand.)
Then in January came news of a
$6.2 billion charge related to costs
incurred more than a decade ago by
GE’s financial-services business, an
announcement that triggered a U.S.
Securities and Exchange Commission
investigation. GE’s new CEO, John
Flannery, has grimly promised that “all
options are on the table,” including the
once-unthinkable option of dismembering the company entirely.
February 5, 2018
And yet, little of this has to do with
the stuff GE makes. Its jet engines still
dominate the global market. Its turbines, whether in gas, coal, or nuclear
power plants, still provide a third of the
world’s electricity. Its CT scanners and
MRI machines are still the state of the
art. So what happened?
Unlike General Motors Co., Boeing Co.,
and other American manufacturing
icons, GE isn’t associated in the public imagination with just one industry or one product, but rather with
industrial innovation itself. Famously
co-founded by Thomas Edison, GE was
actually run in its early years by another
co-founder, Charles Coffin. The former
shoemaker saved the young company
from insolvency by negotiating with J.P.
Morgan, untangled key patent rights
with Westinghouse, and established
the industrial research laboratory that
would bring so many good things to life.
Since Coffin, GE’s secret weapon—
and in a way its dominant product—
has been its managers. The company
brought organizational rigor to the
process of scientific discovery, and
scientific rigor to management. In the
postwar years, GE hired psychologists
for a personnel research department.
It also bought an estate on the Hudson
River an hour north of New York City
and turned it into the world’s most
famous management training center.
Crotonville, as it came to be known,
was a place where current and future
leaders would retreat to be taught,
tested, and imbued with the company’s values. GE’s courtly CEO and chairman in the 1970s, Reginald Jones, was
the most admired business executive of
his era, pushing into international markets and serving as an adviser to four
U.S. presidents.
Jones’s successor was a chemical
engineer named John Welch Jr. who’d
risen through the ranks of GE’s plastics
division. You may know him as Jack.
Under Welch, GE came to be seen as a
factory for elite corporate talent. The
new boss placed a premium on leadership development and the ruthless culling of underperforming employees. He
became the highest-profile evangelist
PREVIOUS SPREAD: PRODUCT IMAGES COURTESY GE
Bloomberg Businessweek
Bloomberg Businessweek
BETTMANN/GETTY IMAGES
A dial-studded GE computer used
to model a complex electric power
system, Columbus, Ohio, 1955
for Six Sigma, a management philosophy based on the systematic pursuit of
otherworldly flawlessness. Promising
young executives were moved between
distant poles of the GE empire—from
medical devices to locomotives to NBC
(GE bought the television network in
1986)—so they could inject fresh ideas
and test themselves. Armed with Six
Sigma, inspired by Jack, honed by the
breakout sessions at Crotonville, GE’s
organizational officer corps could run
anything, the thinking went.
The company’s mandarin confidence was reflected in the tradition of
allowing chief executives tenures that
measured in the decades, so they could
lift their eyes from the daily fever line of
the stock market to more distant horizons. Over time, Welch’s management
teachings became a best-selling literary
subgenre. Fortune magazine named him
manager of the century, and other business periodicals were no less fulsome
in their praise (this one gave him a regular column). Such was the premium
placed on GE managerial talent that
when Immelt, with papal pomp, was
unveiled as Welch’s successor, the other
two longtime GE executives who’d been
finalists for the job were quickly hired as
CEOs by 3M Co. and Home Depot Inc.
GE became the great counterexample
to a growing skepticism among investors and economists about giant diversified companies. During the 1980s, as
conglomerates were increasingly written off as lumbering and opaque, GE
was lauded as what researchers at the
Boston Consulting Group called a “premium conglomerate”—focused despite
its diversity, nimble despite its scale,
February 5, 2018
and armored against cyclical downturns in individual industries. And if GE
also became known for eschewing generally accepted accounting principles
in favor of more exotic and less informative measures, investors and analysts could at least take comfort that the
company was in capable hands.
Under Welch, GE’s net income
swelled from $1.65 billion in 1981 to
$12.7 billion in 2000, even as its workforce shrank from 404,000 to 313,000.
But over time, less and less of that
income came from technological innovations or manufacturing prowess or
even the productivity gains Welch had
wrung out early in his tenure. Instead
it came from GE’s financial-services
arm. From its humble beginnings
financing family purchases of refrigerators and dishwashers during the Great
Depression, GE Capital had ballooned
into a behemoth whose global stable of
investments ran from insurance to aircraft leasing to mortgages, giving GE
a share of the action during a period
when the financial sector was the
fastest-growing part of a fast-growing
U.S. economy.
In the hands of GE’s financial executives and tax lawyers, earnings from
this division had special powers.
45
General Decline
GE has been the worst-performing stock in the Dow Jones
industrial average for more than a year
Boeing
100%
50
0
GE
12/30/16 1/30/18
-50
46
GE Capital could borrow money in
the U.S. to fund offshore businesses in
countries where corporate taxes were
much lower (or nonexistent), then turn
around and use the interest charges on
those loans to offset the income from
GE’s onshore manufacturing businesses, making its U.S. tax bills disappear. And unlike a factory, GE Capital’s
highly liquid assets could be bought or
sold at the ends of quarters to ensure
the smoothly rising earnings that investors loved. The term accountants use
for earnings from these sorts of one-off
asset sales is “low-quality,” but through
the his …
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