Disney is a Story Worth Watching

Disney's generous valuation makes it a precarious investment since goodwill and intangibles are 43% of total assets.

Mar 27, 2014 at 1:30PM

The Walt Disney Company's (NYSE : DIS) stock has increased from $30 to $80 since July 2011, expanding its P/E multiple to 22. Despite this increase in valuation many on Wall Street believe the stock is certainly worth a look as it owns outstanding movie franchises like Monsters Inc. and Frozen. While these recent successes shouldn't be ignored Foolish investors interested in Disney should tread lightly given its rich pricing relative to competitors, obscure accounting methods, and large goodwill balance. 

Strong History
Disney has had some very strong movie brands over the years which include Toy Story, Finding Nemo, Pirates of the Caribbean, and National Treasure. The recent animated film Frozen recently broke $1 billion in sales and has out-grossed The Dark Knight and Jurassic Park. In the next few years, Disney is expected to release another National Treasure, Toy Story, and Pirates of the Caribbean. Even with powerhouse brands in the G-rated to PG 13-rated movies and 11 new titles coming out in 2014, Foolish investors should look past the box office success and analyze the underlying financials. In addition to this, there are few key accounting situations that are both unique to Disney and warrant closer inspection.

Revenue & expense recognition
Disney's method of recognizing revenue and costs are intricate. The accounting principles public corporations adhere to demand that revenues and expenses best match each other. The problem for Foolish investors is that revenues or expenses may be stretched out or dwindled down in ways that do not provide an accurate view of true operations. Disney's large revenue accounts are recognized as followed:

1. Revenues from theater distribution of motion pictures are recognized when exhibited.

2. Revenues from home entertainment and video game sales are recognized once made available for sale by retailers.

3. Revenues from the licensing of feature films and television programming are recorded when the content is available for telecast.

The above revenue items are complicated by how their respective costs are accounted for. The expenses are "estimated" by the product life cycle, based upon the ratio of the current period's revenues to the estimated remaining total revenues (Ultimate Revenues). Essentially, if Disney estimates an increase in Ultimate Revenues, it will report a lower cost for that period.

The significance of this is stated in Disney's 10K filing. "With respect to films intended for theatrical release, the most sensitive factor affecting our estimate of Ultimate Revenues is theatrical performance. Theatrical performance varies primarily based upon the public interest and demand for a particular film, the popularity of competing films at the time of release and the level of marketing effort."

While its reasonable to suspect that Disney has become good at estimating how a film or show may do, this is still a very uncertain discipline. Movies and shows that may expect large popularity could fizzle. There is a very real chance that Disney could be under reporting its costs, unintentionally or intentionally.

Goodwill & intangibles
Disney has a large amount of goodwill & intangible assets. These assets account for approximately 43% of total assets.

Goodwill & Intangibles

# in millions



Media Networks



Studio Entertainment









Source: Corporate SEC Filings

Disney's business model is highly involved within media and entertainment, so a high goodwill balance is expected. Time Warner (NYSE : TWX) and Twenty-First Century Fox, (NasdaqGS : FOXA) both have large balances of goodwill and intangibles relative to total assets.

FY 2013






Intangible Assets



Total Assets



Source: Yahoo! Finance. Numbers are in thousands.

The large balances of goodwill and intangibles for these companies should keep Foolish investors on guard. The intellectual goodwill Disney has accumulated is valuable as long as the company can continue to generate revenues from those properties but should the day come when profits stop watch out.

 High P/E multiple
Disney's 22 P/E multiple is well above competitors Time Warner and Fox.



Time Warner


EPS (ttm):




P/E (ttm):




It is difficult to tell if the difference in P/E is warranted or not. Certainly the business of Disney is different than it's two peers. With that said, Disney's operating margin of 22% is between that of Time Warner's 23% and Fox's 17%. What this tells us is that while Disney owns some amazing media properties is overall profitability is not outstanding within the broader industry. 

Foolish Takeaway
Disney's stock is a precarious investment as it trades at a P/E multiple well above peers. While its movies may be worth watching, the large goodwill balance and expense recognition are something worth keeping an eye on as well. With the rich valuation, it may be best to sit on the sidelines as this story plays out.

Boost your 2014 returns with The Motley Fool's top stock
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

christian sgrignoli has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers