A good time to buy? Mariott Internatinal, Inc
Question 3: Does the company pay a dividend?
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- Question 4: Are the historical and projected earnings positive
- Question 5: Is management controlling costs and revenue
- Other issues
- Price/Earnings Discussion
- Summary
- Conclusion
Question 3: Does the company pay a dividend?Since 1997, the company has paid a cash dividend that has grown through the years. Figure 2 indicates dividend payout per share over the last 10 years. (The stock symbol for the Disney Corporation is DIS). . Figure 27: Disney Corporation historical dividends per share.33 During 1998, the company’s Board of Directors decided to move to an annual, rather than quarterly, dividend policy to reduce costs and simplify payments to common stock holders. Accordingly, there was no dividend payment during the year ended September 30,1999. The dividend payments for fiscal years 2000 and 2001 were identical ($0.21 per Disney share). According to the most recent annual report, however, the projected dividends will continue to increase. Response to question 3 is YES. Question 4: Are the historical and projected earnings positive?The earnings posted by Disney Corporation have been positive since 1990. Figure 3 shows a historical graph. 
Figure 28: History of Earnings per Share, Disney Corporation.34 As shown in figure 3, the September 11 terrorist attacks impacted the earnings per share. This was mostly due to the decline in attendance at the Parks and Resorts segment of the corporation. Figure 4 shows Disney projects earnings of 11.44% over the next five years. This is a difficult rate to sustain, so careful scrutiny of the corporate trends will need to take place to ensure they fulfill this expectation.
Figure 29: Projected earnings per share, Disney Corporation.35 Response to question 4 is YES. Question 5: Is management controlling costs and revenue?This question is one of the most difficult to assess. One of the approaches that analysts suggest to answer this question is to determine the company’s historical pretax profit margin and compare that to the industry average over the same period. Many analysts, however, insist this cannot be assessed unless the company has existed as a unique entity for at least 10 years. Since 1997, Disney Corporation has decreased their pretax profit margin from 15% to 5%. The industry average is approximately 6.25% over the last 5 years. Figure 30: Pre-tax Profit Margin for Disney Corporation36 The 2001 pre-tax profit is below both Disney’s 5-year average and the 5-year industry average. This negative sign for the corporation should be tracked since it could indicate rising operating costs or other issues. Another important indicator of management costs and revenue control is the return on equity (ROE) compared to industry and to the company’s historical ROE. Disney’s most recent fiscal year end ROE of 0.50% is well below its five-year average of 6.30% and it is also well below the five-year industry average of 4.40% Declining ROE are "red flags" that should be studied. They may indicate increasing competition, rising labor and raw material costs, or product quality problems plaguing the company. A potential investor should check Disney’s quarterly report for recent improvement in the company's return on equity. 
Figure 31: Disney Corporation Return on Equity37 Figure 7 further demonstrates the dramatic decline of ROE. Management has initiated a process to mitigate the cash flow problems that have resulted since September 2001. An interesting note is that compared to similar companies in 2001, Disney leads its competition in return on equity, return on assets, and return on invested capital. This is a sign that Disney is able to turn shareholder’s equity into profits, uses asset much better, and made good use of debt and equity better than their competitors. 
Figure 32: Disney Corporation ROE, ROA and ROIC38 Compared to industry averages over the past 3 years, the company’s performance is not as positive. Figure 8 indicates the relative performance of Disney to the industry, sector, and the popular Standard & Poor’s (S&P) 500. These indicate Marriott’s performance, while not stellar, is slightly above the industry.  Figure 33: Industry Comparisons with Disney Corporation.39
The response to this question, as mentioned previously, is difficult. Although Disney is not exhibiting remarkable performance at present, it is compete with the industry and remain slightly ahead. However, quarterly reports should be monitored to determine if Disney is able to get back on track and increase ROE. The response to this question is NEUTRAL. Other issuesIntrinsic valueHow is the stock priced per calculated value of the stock? The answer to this question yields interesting information regarding the company and its perceived strength by corporate and individual investors. An intrinsic value/share is a hypothetical value based on the sum of a company's future earnings. This value can be compared to a stock's current price to help determine if a stock is overvalued or undervalued. Assumptions and data required for this calculation are:
If we assume initial earnings of $1.14 billion grow at a rate of 11.44%, and we discount those future earnings at a rate of 15.00%, we arrive at a net present value for the company's next 10 years of earnings of $9.65 billion. To account for potential earnings beyond the 10th year, we estimate a growth rate of 6.00%, a discount rate of 12.00%, and we arrive at a continuing value of $14.7 billion. To complete the calculation, we add these two figures together, subtract the long-term debt for Disney ($15 billion), and divide by the outstanding shares (2.04 billion) to get a per share intrinsic value of $4.60. Given the above earnings and discount rate, Disney must grow earnings at a rate of 24.4% annually for 10 years to justify its current stock price of $23.18. 
Figure 34: Intrinsic Stock and Current Stock Selling Prices41 The stock is currently selling much higher than this analysis recommends. This is an indication there is risk in purchasing this stock at this time. Price/Earnings DiscussionPrice/earnings (P/E) and price/sales (P/S) ratios measure how the market values a stock compared to its earnings, sales, and estimated earnings growth. A low P/E ratio (in comparison to the industry) indicates the market is undervaluing a stock. The P/S ratio is especially important when the company has no reported earnings (and thus no P/E). Disney’s P/E ratio is currently at 42.1 and is 86.80% lower than the industry average, which indicates investors are buying Disney’s earnings at a discount. This lower valuation may indicate a bargain, but could also represent the market's low expectations for the company. Since earnings tend to fluctuate and can often distort the P/E ratio, investors should confirm the valuation by looking at P/S and other similar ratios Disney’s P/S ratio is currently at 1.92, and is 76.18% lower than the industry average, which indicates that investors are buying Disney’s revenue at a significant discount. This may be an indication of lower margins (ability to convert sales to earnings) or below-average sales growth. 
Figure 35: P/E and P/S Values for Disney For this stock, it is important to consider the life cycle phase of the industry. The phases for an industry can be classified as pioneer, growth, mature, or declining. In the pioneer phase, product acceptance is questionable, and implementation of the business strategy is unclear. Companies in a pioneer industry are usually high risk. In the growth phase, product acceptance is established and sales and earnings for the industry are accelerating. Companies in an industry in this phase must still properly execute their business strategy. In the mature phase, the industry growth mirrors that of the general economy. Companies in a mature industry are often forced to gain market share by stealing it from other companies. Finally, in the declining phase, shifting tastes or technologies have eroded the demand for the products. Companies in a declining industry often consolidate to remain profitable, or diversify into other industries altogether. Disney is somewhere between the mature phase and the declining phase. The management team seems to be aware of the company’s situational phase, and in the past have reacted to the changing phases in a competent and proactive way. Examples of this can be seen in the diversification of Disney. There are issues they must deal with now, however, as illustrated in the figure below. Figure 11 shows Disney trailing the industry in a comparison of P/E and P/S over a 12-month period. 
Figure 36: Trailing 12 Months P/E and P/S comparison with industry. SummaryIt is always a challenge to assess whether or not to purchase a stock. In this case, it is even harder because of the overvaluation of the entire sector in this market. Figure 12 summarizes this comparison between Disney and industry.  Figure 37: Growth comparisons between Disney and Industry
Figure 13 further details this information with the use of debt/equity and long-term debt ratios. 
Figure 38: Ratios Conclusion
Table 1: Summary of questions and answers for analysis of Mariott
Table 2: Summary of questions and answers for analysis of Delta
Table 3: Summary of questions and answers for analysis of Disney The total of the summary above forms our recommendations. If the stock is currently part of your portfolio, do not sell it. Continue to hold the stock, as it appears to be holding its value. We recommend against purchasing this stock at this time. It is extremely overvalued, and there are better-valued, better performing stocks available in today’s market. For a brief period of time after the market drop in September and October 2001, the stock seemed to be better priced and could have been a better value. That ended in about February 2002. 1 Marriott International, Inc, 2000 Annual Report 2 http://www.marriott.com/corporateinfo/milestone.asp 3 Marriott International Inc. 10-K filing March 22, 2002 pp 13 4 Ibid. pp 15 5 Data gathered from www.quicken.com 6 Ibid pp 12-14 7 Data gathered from www.quicken.com 8 Ibid 9 Ibid 10 Ibid 11 Ibid 12 Ibid 13 Ibid 14 Ibid 15 Ibid 16 http://www.delta.com/home/press_url/dal_stats_facts/daltimeline/index.jsp 17 http://www.delta.com/inside/investors/corp_info/index.jsp 18 Delta Airlines Inc. Form 10-Q For the quarterly period ended September 30, 2001, pp 25 19 Data gathered from www.quicken.com 20 Ibid 21 Ibid 22 Ibid 23 Ibid 24 Ibid 25 Ibid 26 Ibid 27 The Walt Disney Company Annual Report 2001 28 http://disney.go.com/corporate/investors/index_flash.html 29 The Disney Company 10-K Financial Report 30 Ibid 31 Data gathered from www.quicken.com 32 Ibid pp 12-14 33 Data gathered from www.quicken.com 34 Ibid 35 Ibid 36 Ibid 37 Ibid 38 Ibid 39 Ibid 40 Ibid 41 Ibid Download 189.26 Kb. Share with your friends:
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