the walt disney company - credit suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

27 October 2016Americas/United States

Equity ResearchEntertainment

The Walt Disney Company (DIS)

DECREASE TARGET PRICE Rating OUTPERFORMPrice (26-Oct-16,US$) 93.49Target price (US$) (from 128.00) 125.0052-week price range 120.07 - 88.85Market cap (US$ m) 150,247.89*Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector.¹Target price is for 12 months.

Research AnalystsOmar Sheikh212 325 6818

[email protected]

Lawrence Dann-Fenwick212 538 8442

[email protected]

Boyao Sun212 325 3494

[email protected]

Premium assets, strategic challenges■ Reduce forecasts and TP: We trim our 2017/18 EPS forecasts by 2%/4% to

$6.00/$6.79 (from $6.13/$7.09) ahead of Q4 earnings on 10 November, driven by 10%/11% lower forecasts at Cable Networks and 12%/6% lower forecasts at Consumer Products. We reduce our TP to $125 (previously $128). Disney's content assets and monetization model are the envy of the industry, but changing consumer habits and the proposed AT&T/Time Warner transaction are creating strategic headwinds. We are confident the management team will rise to these challenges, and remain Outperform.

■ Implications of AT&T/Time Warner: If the merger is consummated, AT&T/Time Warner will have 3.5x Disney's EBITDA and 2.6x its FCF this year, as well as >50m direct customer relationships in US wireless alone. This will confer an enhanced ability to bid for sports rights from 2021 onwards, and thereby put pressure on Disney to invest further in ESPN's direct to consumer distribution capabilities. It can do this organically or inorganically: Twitter (NR) and Netflix (N, $130) are two listed options for the latter, but we believe the organic option would be significantly less costly and give Disney the opportunity to tailor new services around its own IP.

■ Weak NFL ratings: Season-to-date ratings for NFL games on ESPN are down 19% y/y. We are confident the election, poor matchups, player issues and the absence of sports betting have played a part, and would not extrapolate the first five weeks. However, we think the declines make it prudent to be conservative at this point, and reduced our advertising growth forecasts at ESPN for 2017 to 2% (from 6%).

■ Valuation: Disney trades at a c10% premium to peers on '17 EV/EBITDA (9.8x vs 8.9x), but at a c30% premium on '17 P/E (15.6x vs 11.9x). At our new $125 target, DIS would trade at 12.3x '17 EV/EBITDA, 20.9x '17 P/E.

Share price performance

D IS.N S& P 5 0 0 IN D EX

Jan - 1 6 A p r - 1 6 Ju l - 1 6 O ct - 1 68 09 0

1 0 01 1 01 2 01 3 0

On 26-Oct-2016 the S&P 500 INDEX closed at 2139.43Daily Oct27, 2015 - Oct26, 2016, 10/27/15 = US$113.77

Quarterly EPS Q1 Q2 Q3 Q42015A 1.27 1.23 1.45 1.202016E 1.63 1.36 1.62 1.192017E - - - -

Financial and valuation metricsYear 10/15A 10/16E 10/17E 10/18EEPS (CS adj.) (US$) 5.15 5.75 6.00 6.79Prev. EPS (US$) - 5.77 6.13 7.09P/E (x) 18.1 16.3 15.6 13.8P/E rel. (%) 97.6 88.3 95.0 94.1Revenue (US$ m) 52,465.0 56,397.5 58,141.8 61,598.7EBITDA (US$ m) 15,578.0 16,922.6 17,160.4 18,447.8OCFPS (US$) 6.38 7.56 8.20 9.04P/OCF (x) 16.1 12.4 11.4 10.3EV/EBITDA (current) 10.5 9.8 9.8 9.2Net debt (US$ m) 13,067 15,569 17,134 19,941ROIC (%) 13.68 14.81 15.30 16.97

Number of shares (m) 1,607.10 IC (current, US$ m) 61,722.00BV/share (Next Qtr., US$) - EV/IC (x) -Net debt (Next Qtr., US$ m) - Dividend (current, US$) 2.84Net debt/tot eq (Next Qtr.,%) - Dividend yield (%) -Source: Company data, Thomson Reuters, Credit Suisse estimates

27 October 2016

The Walt Disney Company (DIS) 2

The Walt Disney Company (DIS)Price (26 Oct 2016): US$93.49; Rating: OUTPERFORM; Target Price: (from US$128.00) US$125.00; Analyst: Omar SheikhIncome Statement 10/15A 10/16E 10/17E 10/18ERevenue (US$ m) 52,465.0 56,397.5 58,141.8 61,598.7EBITDA 15,578 16,923 17,160 18,448Depr. & amort. (2,354) (2,471) (2,558) (2,642)EBIT (US$) 13,224 14,451 14,602 15,806Net interest exp (117) (150) (156) (165)Associates 814 1,261 1,002 1,057Other adj. (53) (125) (0) 0PBT (US$) 13,868 15,438 15,448 16,698Income taxes (5,016) (5,403) (5,407) (5,844)Profit after tax 8,852 10,035 10,041 10,854Minorities (470) (494) (508) (524)Preferred dividends - - - -Associates & other 424 (24) 0 0Net profit (US$) 8,806 9,517 9,533 10,330Other NPAT adjustments (424) 24 0 0Reported net income 8,382 9,541 9,533 10,330Cash Flow 10/15A 10/16E 10/17E 10/18EEBIT 13,224 14,451 14,602 15,806Net interest (117) (150) (156) (165)Cash taxes paid - - - -Change in working capital 129 (227) 179 21Other cash & non-cash items (2,327) (1,560) (1,605) (1,923)Cash flow from operations 10,909 12,515 13,020 13,739CAPEX (4,265) (4,960) (2,728) (2,557)Free cashflow to the firm 6,644 7,555 10,292 11,182Aquisitions 0 0 0 0Divestments - - - -Other investment/(outflows) 20 0 0 0Cash flow from investments (4,245) (4,960) (2,728) (2,557)Net share issue(/repurchase) (6,095) (8,000) (10,000) (12,000)Dividends paid (3,063) (2,351) (2,481) (2,612)Issuance (retirement) of debt 2,705 747 2,079 2,821Other (1,602) 48 (1,455) (2,197)Cashflow from financing activities (8,055) (9,557) (11,857) (13,989)Effect of exchange rates (302) (500) 0 0Changes in Net Cash/Debt (1,693) (2,502) (1,565) (2,807)Net debt at start 11,374 13,067 15,569 17,134Change in net debt 1,693 2,502 1,565 2,807Net debt at end 13,067 15,569 17,134 19,941Balance Sheet (US$) 10/15A 10/16E 10/17E 10/18EAssetsCash & cash equivalents 4,269 2,500 3,000 3,000Account receivables 8,019 8,564 8,538 8,737Inventory 1,571 1,689 1,741 1,844Other current assets 2,899 2,969 3,044 3,122Total current assets 16,758 15,722 16,322 16,704Total fixed assets 25,179 27,904 28,315 28,477Intangible assets and goodwill 34,998 34,762 34,521 34,274Investment securities 167 167 167 167Other assets 11,080 11,327 11,585 11,852Total assets 88,182 89,882 90,910 91,474LiabilitiesAccounts payables 7,844 8,280 8,486 8,810Short-term debt 0 0 0 0Other short term liabilities 8,490 8,748 6,478 6,408Total current liabilities 16,334 17,028 14,964 15,218Long-term debt 12,773 13,519 18,013 21,116Other liabilities 10,420 11,490 13,036 14,526Total liabilities 39,527 42,037 46,013 50,860Shareholder equity 44,525 43,715 40,767 36,484Minority interests 4,130 4,130 4,130 4,130Total liabilities and equity 88,182 89,882 90,910 91,474Net debt 13,067 15,569 17,134 19,941

Per share 10/15A 10/16E 10/17E 10/18ENo. of shares (wtd avg) 1,709 1,656 1,588 1,520CS adj. EPS 5.15 5.75 6.00 6.79Prev. EPS (US$) - 5.77 6.13 7.09Dividend (US$) 1.81 1.42 1.56 1.72Dividend payout ratio 35.13 24.71 26.02 25.29Free cash flow per share 3.89 4.56 6.48 7.35Earnings 10/15A 10/16E 10/17E 10/18ESales growth (%) 7.5 7.5 3.1 5.9EBIT growth (%) 14.6 9.3 1.0 8.2Net profit growth (%) 15.5 8.1 0.2 8.4EPS growth (%) 18.9 11.5 4.4 13.2EBITDA margin (%) 29.7 30.0 29.5 29.9EBIT margin (%) 25.2 25.6 25.1 25.7Pretax margin (%) 26.4 27.4 26.6 27.1Net margin (%) 16.8 16.9 16.4 16.8Valuation 10/15A 10/16E 10/17E 10/18EEV/Sales (x) 3.11 2.94 2.88 2.76EV/EBITDA (x) 10.5 9.8 9.8 9.2EV/EBIT (x) 12.3 11.5 11.5 10.8P/E (x) 18.1 16.3 15.6 13.8Price to book (x) 3.6 3.5 3.6 3.9Asset turnover 0.6 0.6 0.6 0.7Returns 10/15A 10/16E 10/17E 10/18EROE stated-return on (%) 18.7 21.6 22.6 26.7ROIC (%) 0.1 0.1 0.2 0.2Interest burden (%) 1.05 1.07 1.06 1.06Tax rate (%) 36.2 35.0 35.0 35.0Financial leverage (%) 0.39 0.41 0.49 0.63Gearing 10/15A 10/16E 10/17E 10/18ENet debt/equity (%) 26.9 32.5 38.2 49.1Net Debt to EBITDA (x) 0.8 0.9 1.0 1.1Interest coverage ratio (X) 113.0 96.4 93.7 95.6Quarterly EPS Q1 Q2 Q3 Q42015A 1.27 1.23 1.45 1.202016E 1.63 1.36 1.62 1.192017E - - - -

Share price performance

D IS.N S& P 5 0 0 IN D EX

Jan - 1 6 A p r - 1 6 Ju l - 1 6 O ct - 1 68 09 0

1 0 01 1 01 2 01 3 0

On 26-Oct-2016 the S&P 500 INDEX closed at 2139.43Daily Oct27, 2015 - Oct26, 2016, 10/27/15 = US$113.77

Source: Company data, Thomson Reuters, Credit Suisse estimates

27 October 2016


What's changed?■ We reduce our 2017/18 EPS forecasts by 2%/4% to $6.00/$6.79 (from $6.13/$7.09),

driven by lower estimates for Cable Networks and Consumer Products, partially offset by higher estimates for Studio Entertainment.

■ For Cable Networks, we reduce our operating income forecasts for 2017/18 by 10%/11% and now factor in lower ad growth in 2017 (3% vs 6% previously) couple with higher non-programming costs (5% vs zero previously). We now expect Cable Networks operating income will decline by 2% in 2017 before returning to 5% growth in 2018.

■ For Consumer Products, we reduce operating income forecasts in 2017/18 by 12%/6%. We now factor in softer operating income growth in 2017 (9% vs 27% previously), driven by a soft patch in both licensing/publishing and retail revenues, before a reacceleration in 2018 to 13% operating income growth in 2018, driven by a strong slate of new movies.

■ For Studio Entertainment, we raise operating income forecasts in 2017/18 by 25%/4%. We now expect 2017 operating income to step down by 17% y/y from the very strong 2016 comparable (we previously forecast a 33% step-down). For 2018, we forecast Studio operating income will grow 15% (previously 38%), driven by the strong slate, including Star Wars Episode VIII.

■ We lower our TP to $125 from $128, based on 12.3x 2017 EV/EBITDA, 20.9x 2017 P/E, in line with the stock's recent trading range. Our valuation is supported by our DCF (WACC 7.3%, growth 2%).

Figure 1: Disney summary changes to Income Statement forecasts2015

New Old ∆ % y/y % New Old ∆ % y/y % New Old ∆ % y/y %Revenue

Cable Networks $16,581 $16,966 $17,188 -1% $17,435 $17,853 -2% $18,258 $18,818 -3%Broadcasting $6,683 $6,692 $6,692 0% $6,908 $6,908 0% $7,073 $7,073 0%

Media Networks $23,264 $23,658 $23,880 -1% $24,343 $24,761 -2% $25,331 $25,891 -2%Parks & Resorts $16,162 $17,475 $18,006 -3% $18,751 $18,999 -1% $19,769 $20,035 -1%Studio Entertainment $7,366 $9,509 $9,509 0% $8,954 $8,318 8% $9,996 $9,286 8%Consumer Products & Interactive Media $5,673 $5,755 $5,732 0% $6,094 $6,345 -4% $6,503 $6,600 -1%Total Revenue $52,465 $56,397 $57,127 -1% 7% $58,142 $58,424 0% 3% $61,599 $61,812 0% 6%Segment Operating Income

Cable Networks $6,787 $6,821 $7,043 -3% $6,696 $7,410 -10% $7,005 $7,874 -11%Broadcasting $1,006 $1,130 $1,130 0% $1,316 $1,316 0% $1,391 $1,391 0%

Media Networks $7,793 $7,952 $8,174 -3% $8,012 $8,726 -8% $8,396 $9,265 -9%Parks & Resorts $3,031 $3,219 $3,324 -3% $3,610 $3,657 -1% $3,849 $3,899 -1%Studio Entertainment $1,973 $3,042 $3,042 0% $2,526 $2,021 25% $2,907 $2,797 4%Consumer Products & Interactive Media $1,884 $1,990 $1,967 1% $2,165 $2,467 -12% $2,456 $2,605 -6%Segment Operating Income $14,681 $16,203 $16,506 -2% 10% $16,313 $16,871 -3% $17,608 $18,566 -5%Net Income $8,382 $9,541 $9,581 0% $9,533 $9,735 -2% $10,330 $10,777 -4%EPS $5.15 $5.75 $5.77 0% 12% $6.00 $6.13 -2% 4% $6.79 $7.09 -4% 13%

2018E2016E 2017E

Source: Company data, Credit Suisse estimates

Lowering forecasts for Cable NetworksThe main drivers of our reduced forecasts in Disney's Cable Networks division are (i) modest reductions in our 2018-20 expectations for affiliate revenue growth, now 5% (previously 6%); (ii) lower advertising forecasts in 2017 (3% from 6% previously), following weaker than expected NFL ratings at the start of the season (see section below); and (iii) higher non-programming cost growth (5% vs zero previously), which assumes less benefit flowing through from recent headcount reductions at ESPN. We summarise the changes to our forecasts in Figure 2 and Figure 3 below, which highlights that we now expect EBIT at Cable Networks to decline by 2% in 2017 vs 2016, or by $125m.

27 October 2016


Figure 2: DIS Cable Networks forecasts 2011-2020E2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Affiliate $8,750 $9,240 $9,816 $10,310 $11,539 $11,683 $12,011 $12,586 $13,189 $13,821Advertising $3,522 $3,785 $3,963 $4,128 $4,334 $4,539 $4,658 $4,883 $5,118 $5,366Other $605 $596 $674 $672 $708 $743 $766 $789 $812 $837Total revenue $12,877 $13,621 $14,453 $15,110 $16,581 $16,966 $17,435 $18,258 $19,120 $20,023Programming $5,199 $5,558 $6,026 $6,404 $7,272 $7,707 $8,191 $8,584 $8,998 $9,433SG&A $2,885 $2,874 $3,023 $2,983 $3,258 $3,225 $3,386 $3,555 $3,733 $3,920EBITDA $4,793 $5,190 $5,405 $5,723 $6,052 $6,034 $5,858 $6,118 $6,388 $6,671Depreciation $134 $141 $139 $145 $150 $152 $153 $155 $156 $158Amortisation $4 $9 $7 $6 $11 $11 $11 $11 $11 $11EBIT $4,655 $5,040 $5,259 $5,572 $5,891 $5,872 $5,694 $5,953 $6,221 $6,502Margin % 36% 37% 36% 37% 36% 35% 33% 33% 33% 32%Equity Income $578 $664 $788 $895 $896 $950 $1,002 $1,052 $1,105 $1,160Reported EBIT $5,233 $5,704 $6,047 $6,467 $6,787 $6,821 $6,696 $7,005 $7,326 $7,662


Figure 3: We expect Cable Networks revenues to grow 3% in 2017, but EBIT to decline 2%, or by $125m, because of the $550m step-up in NBA rights costs

2016E 2017E 2018E 2019E 2020E 2016E 2017E 2018E 2019E 2020EAffiliate 1% 3% 5% 5% 5% $144 $327 $576 $603 $632Advertising 5% 3% 5% 5% 5% $205 $119 $225 $236 $248Other 5% 3% 3% 3% 3% $35 $22 $23 $24 $24Total revenue 2% 3% 5% 5% 5% $385 $469 $823 $862 $904Programming 6% 6% 5% 5% 5% $435 $483 $393 $414 $435SG&A -1% 5% 5% 5% 5% ($33) $161 $169 $178 $187EBITDA 0% -3% 4% 4% 4% ($18) ($176) $260 $270 $282Depreciation 1% 1% 1% 1% 1% $2 $2 $2 $2 $2Amortisation 1% 1% 1% 1% 1% $0 $0 $0 $0 $0EBIT 0% -3% 5% 5% 5% ($19) ($177) $259 $269 $281Equity Income 6% 5% 5% 5% 5% $54 $52 $50 $53 $55Reported EBIT 1% -2% 5% 5% 5% $34 ($125) $309 $321 $336

ESPN subs (m) -2.0% -2.0% -2.0% -2.0% -2.0% (4.7) (1.8) (1.8) (1.8) (1.7)ESPN rates ($/sub/month) 7.0% 5.0% 7.0% 7.0% 7.0% $0.46 $0.35 $0.52 $0.55 $0.59ABC retrans ($m) 17% 15% 12% 10% 10% $86 $84 $81 $74 $81ESPN programming ($m) 1% 13% 5% 5% 5% $45 $586 $255 $267 $281

y/y ∆ ($m)y/y ∆ (% )


NFL ratings down heavily season to dateWe show C3 target demo ratings for NFL content across the six main windows in Figure 4 and Figure 5 below. These include all viewing of commercials in the three days post broadcast for the male 18-49 demographic, the key measure for advertisers. According to Nielsen, ESPN's Monday night ratings are down 19% versus the same period a year ago, while Sunday Night Football on NBC and Thursday Night Football on CBS are showing similar double-digit declines. CBS's and Fox's Sunday games faring a little better, down only in the single digits.

We also show C3 target demo ratings for ESPN's Sportscenter in Figure 6 through Figure 9. These show ratings down 15% in Q3, and down cumulatively by around 40% since 2010. We highlight Sportscenter advertising is very profitable for ESPN, given the very low cost associated with the programming, but would also point out that the declines seen at the start of this season are no worse than for the past 2 years.

27 October 2016


Figure 4: NFL season to date C3 ratings Figure 5: NFL season to date C3 ratings Y/Y change

7.17 7.548.62

11.25

8.44

13.47

5.787.09

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6.83

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NFL Season to date C3 ratings (9/8/16 - 10/9/16)

2015-16 2016-17

-19.4%

-6.0% -7.9%-16.1% -19.1%

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NFL Y/Y Change - Season to date

Source: Nielsen, Credit Suisse estimatesNote: Ratings based on C3, Total Day ratings in M18-49 demographic.


Figure 6: ESPN Sportscenter ratings 2010-2016 Figure 7: y/y % chg in ESPN Sportscenter ratings

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Figure 8: 4 qtr moving average Sportscenter ratings Figure 9: Sportscenter ratings rebased

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ESPN Sportscenter - Rebased

ESPN Sportscenter - Rebased



Driven by these ratings declines, we have reduced our advertising growth forecast for Cable Networks to 3% in 2017 (from 6% previously), which includes 2% growth for ESPN, to incorporate some conservatism into our expectations. However, we believe it is too early to extrapolate the early declines in NFL ratings into the whole year, and would highlight the following explanatory factors for the performance of the properties:

27 October 2016


■ The Presidential election: The election is likely the most significant driver of the ratings declines, as viewers choose to ignore poor matchups (see point below) in favor of election coverage. The Presidential debates themselves first impacted the NFL in week 4, when Monday Night Football on ESPN fell 40% as viewers tuned into the first debate that evening; and in week 5, when NBC's Sunday Night Football fell 18%. We highlight that in the 2008 election (with no incumbent candidate), ratings during the same first five week period were down 3%, which coupled with the average decline of 3% in the last three years explains almost half of this season's current 12.4% decline.

■ Poor matchups: The quality of the teams playing has shifted in many cases, with (on a timeslot comparison) unpopular teams playing vs. stronger matchups from the previous year. This can create blowouts where viewers switch off halfway through, and also means loyal fans may not turn out to watch if they expect the game will be a sweep. Coupled with the political season, this could be a significant driver of the declines. Our analysis of the first five weeks shows in some instances that ratings declines aligned closely with poor team matchups, and press articles support this thesis as well (see here). For example, ESPN’s first two games declined -23% on team quality, in line with ratings which fell -22%.

■ Player issues: Popular players such as Tom Brady from the New England Patriots and Peyton Manning from the Denver Broncos have been absent for the first few weeks (Manning retired), contributing to reduced fan interest from two very popular teams. The Patriots have played twice in the first five weeks, and the Broncos have played three times. In addition, there has also been political controversy involving Colin Kaepernick leading to fans boycotting the league. A YouGov survey found that, of fans who are watching fewer NFL games, 40% said it was due to this controversy.

■ Absence of Fanduel and DraftKings: The absence of last year's wildly popular sports betting services is an overlooked potential contributor to ratings declines this season, as both are under severe regulatory scrutiny and neither are advertising during games. FanDuel alone had 4.5 million users last year (more than half of Sunday Night Football's audience) meaning the absence of both services is likely further contributing to ratings headwinds this season. The 2015-16 NFL season was down only -0.6% vs. the 2014-15 season, which had fallen 3.5%. If the 2015-16 season's strength was driven by sports betting services, then a shortfall in the 2016-17 season is reasonable, in our view.

Finally, we highlight that media buyers themselves are not overly worried by the weak ratings, and college football has remained strong, suggesting there is no structural decline in overall interest in football (see Figure 10).

Figure 10: NCAA Football C3 ratings are much stronger…

Figure 11: …with ESPN's decline driven by a tough comparison to Week 2's huge increase last season

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http://adage.com/article/media/good-news/306346/

http://sports.yahoo.com/news/fans-watching-fewer-nfl-games-cite-protests-as-primary-reason-172059483.html

http://blogs.wsj.com/cmo/2015/09/16/are-draftkings-and-fanduel-bombarding-fans-with-too-many-ads/

http://adage.com/article/media/heaven-hell-preacher-a-respectable-start/306209/

27 October 2016


As we show in Figure 13 below, advertising CPMs from the upfronts indicate that the demand for NFL games which can draw massive audiences has only increased compared from the 2015-16 season. ESPN's Monday Night Football program enjoyed CPM increases of 8% after a c7% increase in the previous season, and FOX has earned 15% more for scatter sales compared to the prior season.

Figure 12: NFL C3 season ratings 2008-2016 Figure 13: NFL advertising prices have continued to grow in 2016

7.51

8.438.95 8.98

8.62 8.39 8.10 8.06

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

09/01/2008 -02/28/2009

09/01/2009 -02/28/2010

09/01/2010 -02/28/2011

09/19/2011 -02/26/2012

09/24/2012 -02/24/2013

09/23/2013 -02/23/2014

09/22/2014 -02/22/2015

09/21/2015 -02/28/2016

7.82% 7.63% 7.37%

8.72%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

NBC Sunday Night Footbal Fox Alternate Sundays CBS Alternate Sundays ESPN Monday Night Footbal

2015-16 Y/Y Change

Source: Nielsen, Credit Suisse Estimates

Note: Duration weighted average of NFL M18-49, C3 ratings on CBS, FOX, NBC, & ESPN for the 2008-09 to 2015-16 seasons.

Source: Adage

Note: CBS Thursday night pricing declined due to the new Thursday night contract, which gave NBC

Implications for ESPN from T/TWX proposed mergerBeyond the near term pressure on ESPN's advertising revenues, a key long term issue for the business will be the company's ability to renew the key sports rights contracts which underpin its cash flows – i.e., NFL (due in 2021), MLB (due in 2021) and NBA (due in 2025). With the traditional video ecosystem suffering from declining subscribers, we believe sports leagues are already considering alternative distribution models, as evidenced by their agreements with new partners including Yahoo and Twitter. We think this highlights that sports leagues are concerned that their long-standing partners (ESPN, Turner, Fox, CBS, NBCU) may not be in a position to pay higher fees for broadcast rights early in the next decade.

In theory, a greater willingness on the part of the major sports leagues to consider alternative business models could leave the door open to new entrants – Apple and Amazon are perhaps the most obvious examples of potential new digital distribution partners, where upstream ownership of sports rights could fit into a broader strategy to bundle video content with either hardware or services sales.

In addition to potential digital new entrants, we would also highlight that the enlarged AT&T/Time Warner will be a formidable competitor for sports rights in the next contract renewal phase. As well has having >50m US wireless customer relationships, as we highlight below, on this year's proforma numbers, the combined company will have 3.5x Disney's EBITDA and 2.6x Disney's Free Cash Flow – AT&T/Time Warner will in fact generate almost as much FCF this year as all its competitors combined.

27 October 2016


Figure 14: AT&T/Time Warner will have 3.5x Disney's EBITDA in 2016… Figure 15: …and 2.6x Disney's Free Cash Flow

$62,545

$26,037

$18,048

$6,597$3,404

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

T/TWX CMCSA DIS FOXA CBS

2016E EBITDA

3.5x

$27,347

$14,264

$10,618

$5,513

$2,912

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

T/TWX CMCSA DIS FOXA CBS

2016E Free Cash Flow

2.6x

Source: Company data, Credit Suisse estimates, Thomson Reuters. T/TWX proforma numbers use consensus forecasts and company filings.

Note: Free Cash Flow defined as EBITDA minus capex minus dividends. Source: Company data, Credit Suisse estimates, Thomson Reuters. T/TWX proforma numbers use consensus forecasts and company filings.

If the value of sports rights will be driven by distributors' ability to cross-subsidize a retail sports channel with cash flows from fixed or wireless broadband services, Disney may find it hard to compete with the vertically integrated players (AT&T/Time Warner and Comcast). We would therefore say that in this case, the AT&T/Time Warner transaction, if consummated, represents a strategic challenge for Disney.

However, if the value of sports rights will be governed by how the content is monetized in standalone form, it becomes more important for Disney to find ways to reach consumers outside the traditional video ecosystem (which is shrinking), in the online video ecosystem (which is growing rapidly). The best way for Disney to reach and engage with consumers in the online ecosystem is to own platforms, so it can control the user experience, have full access to customer data and tailor targeted advertising products – this is precisely the strategy we are already starting to see emerge with Disney's partnerships with virtual MVPDs (Sling, Hulu). This strategy will accelerate from 2017, as new ESPN-branded OTT products are launched in partnership with BAMTech.

We would highlight that our understanding is ESPN's current affiliate agreements include clauses which make it very unlikely that the company will choose to distribute the entire linear network direct to consumer without renegotiating its affiliate agreements. These clauses stipulate that if ESPN takes the network direct to consumer: (i) the affiliate has the right to take ESPN out of the expanded basic bundle; and (ii) the affiliate has the right to take ESPN direct to consumer itself at the wholesale (not the retail) rate. Both suggest it is extremely unlikely that ESPN would consider going direct to consumer until affiliate renewal agreements are under way.

This suggests that as a first step ESPN may have to negotiate new terms with its traditional distribution partners which give it more flexibility to take the linear network direct to consumer. This may have costs – for example in lower affiliate growth than would otherwise have been the case. Affiliates are unlikely to give up rights without a quid pro quo.

It also suggests ESPN will have invest further, either organically or inorganically, to enhance its ability to reach consumers in the online ecosystem directly. The investment in BAMTech will give it some platform capabilities, but we think long term ESPN will need to build subscriber acquisition; customer service; data analytics and user interface capabilities. We have assumed nothing in our forecasts for this investment at this point, and would highlight it as a potential downside risk to our forecasts over the next 1-3 years.

We note recent press speculation (see here) that Disney considered the acquisition of Twitter (Not Rated), and that it may consider the acquisition of Netflix (see here, rated Neutral, TP $130, by Credit Suisse analyst Stephen Ju). We would argue that to the extent

https://www.bloomberg.com/news/articles/2016-10-17/disney-said-to-have-dropped-twitter-pursuit-partly-over-image

http://fortune.com/2016/10/04/disney-acquisition-netflix/

27 October 2016


that either platform provides Disney with the ability to vertically integrate its content assets with a global distribution platform; and provides customer acquisition, customer service, data analytics and user interface capabilities, this type of acquisition would make sense. In our view, of the two, Netflix would make more sense given its proven track record of acquiring, retaining and servicing a global subscriber base.

However, it is also clear that both acquisitions would be hugely expensive – Twitter's market capitalisation is $12.2bn at $17.40 per share, and Netflix's is $54bn at $126.40 per share – relative to the organic "build" option, which would also allow Disney to tailor new services around its own intellectual property.

Net net, we think the probability of Disney choosing to invest inorganically in direct to consumer distribution has risen since the AT&T/Time Warner deal was announced, but would argue it is still less than 50%.

Figure 16: Digital platforms including Netflix, Amazon and Hulu are already vertically integrated

HBO

TNT

TBS

CNN

CartoonNetwork

Adult Swim

HGTV

Food Network

Fox Sports

Fox News

FX

FXX

National Geographic

Fox (Broadcast)

Comedy Central

Nickelodeon

MTV

Spike TV

Discovery Channel

Science

Investigation Discovery

Animal Planet

TLC

OWN

USA

Bravo

CNBC

NBC Sports Network

MSNBC

NBC (Broadcast)

Telemundo(Broadcast)

Fox Universal Warner Bros. Sony Amazon DWA Param’t

Discovery

Netflix

NetflixComcast

HuluDisney MLB NFL NBA

ESPN

Disney XD

ABC Family

ABC (Broadcast)

Disney Time Warner

Viacom Fox Scripps CBSHulu

Set top box Smart TV Games console Tablet Smartphone

CBS (Broadcast)

Showtime

Amazon

Apple YouTube

Comcast Charter AT&T Verizon HuluNetflix Amazon

Apple YouTube

DISH Cox Cab’vision

Origi

nator

sAg

greg

ators

Distr

ibutor

sDe

vices

Source: Credit Suisse research

Lowering forecasts for Consumer Products…We have also reduced our Consumer Products forecasts for 2017/18, and now expect just 8% revenue growth and 10% EBIT growth in 2017, followed by 9% revenue growth and 13% EBIT growth in 2018. After a tough 2016, when revenues are likely to be flat, we expect a return to growth in 2017 (7%) driven by Cars 3 and Rogue One; and then an acceleration in 2018 (driven by Star Wars Episode VIII and Avengers: Infinity War). We also highlight that the volatility in Consumer Products revenues has likely been driven disproportionately by Retail revenues, where the drop-through to EBIT is likely be significantly less (we estimate 25%-50%) than the drop-through for licensing & publishing revenues (we estimate 85%-90%). In other words, given the skew in the division's revenue mix towards licensing & publishing (65% in 2016), $250m-$280m pa growth in these revenues in 2017/18 should make $190m-$260m growth in EBIT in 2017/18, respectively, easy to achieve.

27 October 2016


Figure 17: Both licensing & publishing, and retail revenues slowed in 2016

Figure 18: We see overall Consumer Products revenues returning to growth from 2017

-6%

9%

12%

6%

10%

13% 14%

2%

8%

6% 5% 5%

15%13%

17%

7%9%

11% 12%

-3%

5% 4% 4% 4%

-10%

-5%

0%

5%

10%

15%

20%

2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Licensing & publishing Retail & other

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Licensing & publishing Retail & other

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 19: LTM Consumer Products EBIT is up 2.5x in the last three years…

Figure 20: …and EBIT margins have expanded from 20% to 35% over the same period

$0

$500

$1,000

$1,500

$2,000

$2,500

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

Consumer Products & Interactive Media


0%

5%

10%

15%

20%

25%

30%

35%

40%

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16




…but raising forecasts for StudioWe have remodelled our Studio expectations, and now expect a smaller step-down in profitability in 2017 from the huge 2016 (Star Wars, Zootopia, Jungle Book, Finding Dory, Captain America). We expect Rogue One and Spiderman: Homecoming could both contribute stronger box office receipts than we previously expected, and now only expect a 6% y/y decline in revenues and a 17% y/y decline in EBIT in 2017. For 2018, we see a step-up driven by Star Wars Episode VIII, the Han Solo spin-off film, a new Avengers film, Incredibles 2, and Wreck It Ralph 2. We see the strong 2018 slate driving 12% y/y growth in revenues and 15% y/y growth in EBIT.

27 October 2016


Figure 21: We expect Disney's Studio Entertainment division to perform better in both 2017 and 2018 than we previously expected

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Theatrical Distribution Home Entertainment TV Distribution and Other

Star Wars Episode VIIZootopia

Jungle BookFinding Dory

Captain America: Civil WarBFG

Rogue OneSpiderman: Homecoming

Beauty and the BeastGuardians of the Galaxy 2Pirates of the Caribbean

Cars 3

Star Wars Episode VIIIStar Wars Han Solo

Avengers Infinity War Part IIncredibles 2

Wreck It Ralph 2

Source: BoxOfficeMojo, Company data, Credit Suisse estimates

Figure 22: Studio LTM quarterly EBIT has tripled since Q1 2014…

Figure 23: …driving EBIT margins up from 10% to over 30% over the same period

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

Studio Entertainment


0%

5%

10%

15%

20%

25%

30%

35%

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16




27 October 2016


Figure 24: Disney film slate, FY17-20FY 2017Doctor Strange Marvel Studios 11/4/2016Moana Disney Animation 11/23/2016Rogue One: A Star Wars Story Lucasfilm 12/16/2016Beauty and the Beast (2017) Disney Animation 3/17/2017Born in China Buena Vista 4/21/2017Guardians of the Galaxy Vol. 2 Marvel Studios 5/5/2017Pirates of the Caribbean: Dead Men Tell No Tales Buena Vista 5/26/2017Cars 3 Pixar 6/16/2017Spiderman: Homecoming Marvel Studios 7/7/2017Untitled Disney Fairy-Tale (2017) [Live Action] Disney Animation 7/28/2017

FY 2018Thor: Ragnarok Marvel Studios 11/3/2017Coco Pixar 11/22/2017Star Wars: Episode VIII Lucasfilm 12/15/2017Black Panther Marvel Studios 2/16/2018Untitled Wreck-It Ralph Sequel Disney Animation 3/9/2018Untitled Disney Fairy-Tale #2 (2018) [Live Action] Buena Vista 4/6/2018Avengers: Infinity War Part I Marvel Studios 5/4/2018Untitled Han Solo Star Wars Anthology Film Lucasfilm 5/25/2018The Incredibles 2 Pixar 6/15/2018Ant-Man and the Wasp Marvel Studios 7/6/2018Untitled Disney Live Action #1 (2018) Disney Animation 8/3/2018Frozen 2 Disney Animation rumored 2018

FY 2019Untitled Disney Fairy-Tale #1 (2018) [Live Action] Disney Animation 11/2/2018Gigantic Disney Animation 11/21/2018Mary Poppins Returns Disney Animation 12/25/2018Captain Marvel Marvel Studios 3/8/2019Untitled Disney Fairy Tale (Live Action) Disney Animation 3/29/2019Untitled Disneytoon Movie (2019) Disney Animation 4/12/2019Avengers: Infinity War Part 2 Marvel Studios 5/3/2019Toy Story 4 Pixar 6/21/2019Untitled Indiana Jones (2019) Lucasfilm 7/19/2019Star Wars: Episode IX Lucasfilm 2019

FY 2020Untitled Disney Fairy-Tale #1 (2019) [Live Action] Disney Animation 11/8/2019Untitled Disney Animation (3-D) Disney Animation 11/27/2019Untitled Disney Fairy-Tale #2 (2019) [Live Action] Disney Animation 12/20/2019Untitled Pixar Animation (March 2020) Pixar 3/13/2020Untitled Marvel Movie (May 2020) Marvel Studios 5/1/2020Untitled Pixar Animation (June 2020) Pixar 6/19/2020Untitled Marvel Movie (July 2020) Marvel Studios 7/10/2020Untitled Marvel Movie (November 2020) Marvel Studios 11/6/2020Untitled Disney Animation (Nov 2020) Disney Animation 11/25/2020Untitled Boba Fett Star Wars Anthology Film Lucasfilm 2020

Source: BoxOfficeMojo, Company data, Credit Suisse estimates

27 October 2016


Figure 25: As consumers migrate from the traditional video ecosystem (shown on the left), the strategic imperative is for Disney to reach consumers in the online video ecosystem (shown on the right)

Movie Studios TV Studios Sports Leagues

Drama/Series News

Chat shows Daytime

Marquee sports Regional sportsMovies

Broadcast Networks

Premium sports

networks

CableNetworks

MovieNetworks

Regionalsports

networks

Ad-funded

MVPDs

Cable systems IPTV networksSatellite

C C C C C C C C C C C C C C C C C C C C C C C C C

Affiliate fees$7B Retransmission fees

$4BAffiliate fees$38B Affiliate fees

$7BAffiliate fees$5B

Content licencesContent licences

Content licences Content licences Content

Advertisers

Content

Licence fees Licence fees

Licence feesLicence fees

Licence fees

ContentContent

Content

Content ContentAdvertising$70B

SVOD EST/PPV

Content Content

YouTube

AOL

Yahoo!

Netflix

Amazon

Hulu Plus

Apple

Hulu HBO NOW

% of ad revenueLicence fees

Revenue share

Traditional Video Ecosystem Online Video Ecosystem


27 October 2016


Figure 26: The online video ecosystem is getting more cluttered with products, but growth in the "virtual" MVPDs would be the most constructive for traditional media companies

TV Services NetflixAmazon Prime Showtime HBO Now Seeso YouTube Red

CBS All Access Hulu (SVOD) Hulu (vMVPD)

PlayStationVue Sling TV DirecTV Now Apple EPSN

Parent Co. Netflix Amazon CBS Time Warner NBC Google CBS DIS, NBC,FOXA, TWX

DIS, NBC,FOXA, TWX

Sony DISH Network

AT&T Apple Disney

Advertising No No No No No No Yes Yes Yes Yes Yes Yes Yes Yes

Price (paid subscription)

$9.99/mon $8.25/monor free with

Prime

$10.99/mon $14.99/mon $3.99/mon $9.99/mon $5.99/mon, $9.99/mon for ad-free

$7.99/mon, $10.99/mon for ad-free

$39.99/month

$30/mon $20/mon (Orange),$25/mon

(Blue)$40/mon

(combined)

$35/mon $30-$40/mon

TBA

Restrictions 4 users 2 users 5 users 3 users 1 user 1 user 1 user 1 user TBA 1 user 1 user TBA TBA TBA

Availablecontent

Originals, popular tv shows and

movies


movies

CBS -Showtime

Time Warner - HBO

NBC: Comedy

shows, some original content

Universal, Paramount,

Disney, Sony, some original

content

CBS, some exclusive original content


movies

DIS, FOXA, NBC, TWX

Popular channels

available from all net works

Popular channels

available from all net works

TWX, NBC, Scripps,

Discovery, A&E

ABC, CBS, Fox, HBO

MLB, NHL, College

sports, etc.No NBA or NFL games

Availability 190 Countries, excluding

China

U.S., U.K., Jap., Germ.,

Austria

U.S. U.S., Scandinavia, (Argentina,

Brazil, Spain by year-end)

U.S. U.S., Mexico, Austria, New

Zealand

U.S. U.S. and Japan

U.S. U.S. U.S. Late 2016 TBA 2017, U.S. Only

Platform iOS Devices, Chromecast,

Set Top Boxes, Desktop

iOS, Chromecast, Fire phone, Fire TV, Set Top Boxes,

Desktop

iOS, Chromecast, Roku, Apple TV, Fire TV, Android TV,

Desktop

iOS, Chromecast, Apple TV, Roku, Fire

TV, Desktop

TBA Chromecast, iOS, Roku,

Apple TV, Set Top Boxes,

Desktop

iOS, Chromecast, Roku, Apple TV, Android TV, Desktop

iOS, Chromecast, Roku, Apple TV, Set Top

Boxes, Desktop

TBA PlayStation 3 & 4

Amazon FireTV, Roku,

iOS, Chromecast,

Desktop

Connected devices

iOS Devices, Set Top Boxes

TBA

Users 83mn N/A 1mn 1mn N/A N/A 1mn 12mn N/A N/A 1.1mn N/A N/A N/A

Amount of Content

"Movies: ~5,300;

TV series: ~1,100,

"Films: 17,396;

TV seasons: 1,864"

All Showtime Content

All HBO content

Hundreds of episodes and back seasons

Thousands of videos

>7,500 episodes; live

stream in >100

markets

"Films: ~5,300;

TV series: ~3,700"

Core channels and networks,

deep VOD library

Most channels and

networks

Most channels and

networks

Most channels and

networks

TBA TBA

SVOD vMVPD


27 October 2016


Figure 27: NFL broadcast rights holders 2013-2022NFL

(2013-2022, 9 years)

$6.5bn per season

Fox CBS NBC ESPN

Sunday afternoonNFC

Sunday afternoonAFC

Thursday night (shared with NBC)

Sunday night Thursday night

(shared with CBS)Kick-off game

Thanksgiving game

Monday night(to 2021)

$1.9bn per season,

$17.1bn over 9 seasons

DirecTV

Sunday afternoon,out-of-market

games

NFL Network

$1.5bn per season, $12bn over 8 seasons

$950m per season,


$1.3bn per season, $9bn

over 9 seasons

$1.1bn per season,



Figure 28: NBA broadcast rights holders 2016-2025

NBA(2016-2025, 9

years)$2.6bn per season

ABC ESPN TNT NBA TV

Sunday15 x regular-season

games

Wednesday, Friday, Sunday

85 x regular-season games

Thursday45 x play-off games64 x regular games

Opening nightAll-Star game

100 x regular-season games

Sunday, Monday, Tuesday, Saturday

$1.4bn per season, $12.6bn over 9 seasons

$1.2bn per season, $10.8bn over 9 seasons


27 October 2016


Figure 29: MLB broadcast rights holders 2014-2021

MLB(2014-2021, 8

years)$1.6bn per season

Fox TBS ESPN MLB Network

World SeriesAll-Star Game

1 x LCS52 regular games

(12 exclusive)

1 x LCS2 x Division Series

1 x Wild Card gameAfternoon games

Monday nightWednesday night

Sunday nightPost-season

2 x Wild Card game

MLB All-Star game section show

All-Star Futures game

$850m per season, $6.8bn over 8 seasons

$700m per season, $5.6bn over 8 seasons


27 October 2016


ValuationAt our new $125 Target Price, DIS would trade at 12.3x '17 EV/EBITDA, 20.9x '17 P/E, within the stock's recent trading range (see Figure 30 and Figure 31). Our valuation is supported by our DCF (see Figure 32), which uses a 2% terminal growth and 7.3% WACC.

Figure 30: Disney 12m forward EV/EBITDA Figure 31: Disney 12m forward P/E

0.00x

2.00x

4.00x

6.00x

8.00x

10.00x

12.00x

14.00x

10/26/2006 10/26/2008 10/26/2010 10/26/2012 10/26/2014 10/26/2016

DIS 12m fwd EV/EBITDA

0.00x

5.00x

10.00x

15.00x

20.00x

25.00x

10/26/2006 10/26/2008 10/26/2010 10/26/2012 10/26/2014 10/26/2016

DIS 12m fwd PE

Source: Thomson Reuters Source: Thomson Reuters

Figure 32: Disney DCF valuation2014 2015 2016E 2017E 2018E 2019E 2020E

EBITDA $14,439 $16,221 $17,745 $17,869 $19,192 $20,209 $21,030Net Income $7,624 $8,806 $9,517 $9,533 $10,330 $10,928 $11,393 Depreciation & Amortization $2,288 $2,354 $2,471 $2,558 $2,642 $2,729 $2,820 Other Non-Cash Charges $(240) $(426) $235 $241 $222 $203 $182 After Tax Interest Expense (Income) $338 $381 $191 $193 $197 $201 $206 Changes in Operating Assets & Liabilities $(272) $129 $(227) $179 $21 $70 $126Unlevered Cash Flows $9,738 $11,244 $12,188 $12,705 $13,412 $14,130 $14,727Levered FCFY/Y % Change 4.1% 15.5% 8.4% 4.2% 5.6% 5.4% 4.2% Capital Expenditures $(2,797) $(3,003) $(4,789) $(2,728) $(2,557) $(2,679) $(2,808)Unlevered Free Cash Flows $6,941 $8,241 $7,399 $9,977 $10,855 $11,452 $11,920Y/Y % Change 1.9% 18.7% (10.2)% 34.8% 8.8% 5.5% 4.1%Perpetual UFCF Growth Rate ("G") 2.0%Terminal Value $229,854Terminal EBITDA Multiple 10.9xWeighted Average Cost of Capital 7.3%

NPV of Unlevered Free Cash Flows $44,388Present Value of Terminal Value $173,402Enterprise Value $217,789Plus: Off-Balance Sheet Assets & Other Adjustments $0Adjusted Enterprise Value $217,789Less: Year End Net Debt (Cash) $11,374Equity Value $206,415Diluted Shares Outstanding 1,655.9Equity Value Per Share $125


27 October 2016


Figure 33: Disney summary Income Statements 2013-2020E2013 2014 2015 2016E 2017E 2018E 2019E 2020E CAGR

'15-'20ERevenue

Cable Networks $14,453 $15,110 $16,581 $16,966 $17,435 $18,258 $19,120 $20,023 3.8%Broadcasting $5,903 $6,042 $6,683 $6,692 $6,908 $7,073 $7,222 $7,403 2.1%

Media Networks $20,356 $21,152 $23,264 $23,658 $24,343 $25,331 $26,342 $27,426 3.3%Parks & Resorts $14,087 $15,099 $16,162 $17,475 $18,751 $19,769 $20,851 $22,009 6.4%Studio Entertainment $5,979 $7,278 $7,366 $9,509 $8,954 $9,996 $9,580 $9,157 4.4%Consumer Products & Interactive Media $4,619 $5,284 $5,673 $5,755 $6,094 $6,503 $6,816 $7,132 4.7%Total Revenue $45,041 $48,813 $52,465 $56,397 $58,142 $61,599 $63,589 $65,723 4.6%

EBITDACable Networks $5,405 $5,723 $6,052 $6,034 $5,858 $6,118 $6,388 $6,671 2.0%Broadcasting $923 $992 $1,194 $1,257 $1,423 $1,495 $1,548 $1,632 6.5%

Media Networks $6,327 $6,715 $7,245 $7,291 $7,281 $7,613 $7,937 $8,302 2.8%Parks & Resorts $3,590 $4,137 $4,548 $4,826 $5,286 $5,589 $5,911 $6,255 6.6%Studio Entertainment $822 $1,685 $2,112 $3,185 $2,673 $3,058 $3,227 $3,134 8.2%Consumer Products & Interactive Media $1,215 $1,663 $2,067 $2,186 $2,365 $2,660 $2,854 $3,050 8.1%Corporate (D&A Addback) $274 $239 $249 $256 $264 $272 $280 $289 3.0%Total EBITDA $12,228 $14,439 $16,221 $17,745 $17,869 $19,192 $20,209 $21,030 5.3%

Revenues $45,041 $48,813 $52,465 $56,397 $58,142 $61,599 $63,589 $65,723 4.6%Segment Operating Expenses $32,813 $34,374 $36,244 $38,653 $40,273 $42,407 $43,380 $44,693 4.3%Segment EBITDA $12,228 $14,439 $16,221 $17,745 $17,869 $19,192 $20,209 $21,030 5.3%Corporate Expense ($531) ($611) ($643) ($675) ($709) ($744) ($782) ($821) 5.0%Other $0 $0 $0 ($147) $0 $0 $0 $0EBITDA $11,697 $13,828 $15,578 $16,923 $17,160 $18,448 $19,428 $20,210 5.3%Depreciation $1,957 $2,064 $2,132 $2,235 $2,317 $2,395 $2,477 $2,563 3.7%Amortization $235 $224 $222 $236 $241 $246 $252 $257 3.0%EBIT $9,505 $11,540 $13,224 $14,451 $14,602 $15,806 $16,699 $17,390 5.6%Equity Income of Investees $633 $854 $814 $1,261 $1,002 $1,057 $1,110 $1,165 7.4%EBIT Inc. Equity Income $10,138 $12,394 $14,038 $15,713 $15,604 $16,863 $17,809 $18,554 5.7%

Restructuring and Impairment Charges ($214) ($140) ($53) ($125) $0 $0 $0 $0Other Income (Expense) ($69) ($31) $0 $0 $0 $0 $0 $0Net Interest (Expense) ($235) $23 ($117) ($150) ($156) ($165) ($168) ($172)Income b/f Taxes $9,620 $12,246 $13,868 $15,438 $15,448 $16,698 $17,641 $18,383 5.8%Income Tax (Expense)/Benefit ($2,984) ($4,242) ($5,016) ($5,403) ($5,407) ($5,844) ($6,174) ($6,434) 5.1%Net Income (Loss) a/f Extr. I tems $6,636 $8,004 $8,852 $10,035 $10,041 $10,854 $11,467 $11,949 6.2%Net Inc. Attrib. to Noncontrolling Int. ($500) ($503) ($470) ($494) ($508) ($524) ($539) ($555) 3.4%Net Inc. Attirb. to DIS Shareholders $6,136 $7,501 $8,382 $9,541 $9,533 $10,330 $10,928 $11,393 6.3%Restructuring Charges/Extr. Items, Net $16 $123 $424 ($24) $0 $0 $0 $0Net Income (Loss) b/f Extr. I tems $6,152 $7,624 $8,806 $9,517 $9,533 $10,330 $10,928 $11,393 5.3%Diluted Shares Outstanding 1,813.0 1,759.0 1,709.0 1,655.9 1,588.3 1,520.4 1,441.7 1,358.8 (4.5% )Diluted EPS b/f Extr. I tems (Adj.) $3.39 $4.33 $5.15 $5.75 $6.00 $6.79 $7.58 $8.38 10.2%

Y/Y % Change 10.7% 27.7% 18.9% 11.5% 4.4% 13.2% 11.6% 10.6% (10.9% )Diluted EPS a/f Extr. I tems $3.38 $4.26 $4.90 $5.76 $6.00 $6.79 $7.58 $8.38 11.3%


27 October 2016


Figure 34: Disney summary Cash Flow Statements 2013-2020E2013 2014 2015 2016E 2017E 2018E 2019E 2020E

OPERATING ACTIVITIESNet Income $6,636 $8,004 $8,852 $10,035 $10,041 $10,854 $11,467 $11,949Depreciation $1,957 $2,064 $2,132 $2,235 $2,317 $2,395 $2,477 $2,563Amortization of Intangible Assets $235 $224 $222 $236 $241 $246 $252 $257Cash Distributions Received From Equity Investees $694 $718 $752 $1,165 $926 $977 $1,025 $1,076Equity in Income of Investees ($688) ($854) ($814) ($1,261) ($1,002) ($1,057) ($1,110) ($1,165)Impairment Charges $0 $0 $0 $0 $0 $0 $0 $0Gains on Dispositions ($252) ($299) ($91) $0 $0 $0 $0 $0Change in Film and Television Costs ($49) ($964) ($922) ($318) ($332) ($346) ($362) ($378)Equity Based Compensation $402 $408 $410 $410 $410 $410 $410 $410Deferred Income Taxes $92 $517 ($102) ($102) ($102) ($102) ($102) ($102)Other $322 $234 $341 $341 $341 $341 $341 $341Change in Operating Assets and Liabilities $103 ($272) $129 ($227) $179 $21 $70 $126Net Cash Flow Provided by Operating Activities $9,452 $9,780 $10,909 $12,515 $13,020 $13,739 $14,468 $15,077

INVESTING ACTIVITIESInvestments in Theme Parks, Resorts & Other Property ($2,796) ($3,311) ($4,265) ($4,960) ($2,728) ($2,557) ($2,679) ($2,808)Acquisitions (Net of Cash Acquired) ($2,443) ($402) $0 $0 $0 $0 $0 $0Proceeds from Dispositions $397 $395 $166 $0 $0 $0 $0 $0Other $166 ($27) ($146) $0 $0 $0 $0 $0Net Cash Flow Provided by Investing Activities ($4,676) ($3,345) ($4,245) ($4,960) ($2,728) ($2,557) ($2,679) ($2,808)

Cash Flow After Investing Activities $4,776 $6,435 $6,664 $7,555 $10,292 $11,182 $11,790 $12,269

FINANCING ACTIVITIESCommercial Paper Borrowings, Net ($2,050) $50 $2,376 $747 $2,079 $2,821 $2,685 $2,676Borrowings $3,931 $2,231 $2,550 $0 $0 $0 $0 $0Reduction of Borrowings ($1,502) ($1,648) ($2,221) $0 $0 $0 $0 $0Repurchase of Common Stock ($4,087) ($6,527) ($6,095) ($8,000) ($10,000) ($12,000) ($12,360) ($12,731)Repurchase of Shares Issued for Acquisitions $0 $0 $0 $0 $0 $0 $0 $0Exercise of Stock Options $587 $404 $329 $0 $0 $0 $0 $0Dividends ($1,324) ($1,508) ($3,063) ($2,351) ($2,481) ($2,612) ($2,725) ($2,825)Other $231 $288 $610 $610 $610 $610 $610 $610Net Cash flow Used in Financing Activities ($4,214) ($6,710) ($5,514) ($8,824) ($9,792) ($11,182) ($11,790) ($12,269)

Net Increase in Cash $544 ($510) $848 ($1,769) $500 $0 $0 $0Cash Balance at Beginning of the Year $3,387 $3,931 $3,421 $4,269 $2,500 $3,000 $3,000 $3,000Cash at End of Year $3,931 $3,421 $4,269 $2,500 $3,000 $3,000 $3,000 $3,000


27 October 2016


Figure 35: Disney summary Balance Sheets 2013-2020E2013 2014 2015 2016E 2017E 2018E 2019E 2020E

ASSETSCurrent AssetsCash & Equivalents $3,931 $3,421 $4,269 $2,500 $3,000 $3,000 $3,000 $3,000Receivables $6,967 $7,822 $8,019 $8,564 $8,538 $8,737 $8,702 $8,665Inventories $1,487 $1,574 $1,571 $1,689 $1,741 $1,844 $1,904 $1,968TV Costs $634 $1,061 $1,170 $1,240 $1,315 $1,393 $1,477 $1,566Deferred Income Taxes $485 $497 $767 $767 $767 $767 $767 $767Other Assets $605 $794 $962 $962 $962 $962 $962 $962Total Current Assets $14,109 $15,169 $16,758 $15,722 $16,322 $16,704 $16,812 $16,928Film & TV Costs $4,783 $5,325 $6,183 $6,430 $6,688 $6,955 $7,233 $7,523Investments $2,849 $2,696 $2,643 $2,643 $2,643 $2,643 $2,643 $2,643Theme Parks, Resorts & Other Properties $22,380 $23,332 $25,179 $27,904 $28,315 $28,477 $28,678 $28,923Intangible Assets, net $7,370 $7,434 $7,172 $6,936 $6,695 $6,448 $6,197 $5,940Goodwill $27,324 $27,881 $27,826 $27,826 $27,826 $27,826 $27,826 $27,826Other Assets $2,426 $2,304 $2,421 $2,421 $2,421 $2,421 $2,421 $2,421Total Assets $81,241 $84,141 $88,182 $89,882 $90,910 $91,474 $91,810 $92,203

LIABILITIES AND SHAREHOLDERS' EQUITYCurrent LiabilitiesAccounts & Taxes Payable and other Accrued Liab. $6,803 $7,595 $7,844 $8,280 $8,486 $8,810 $8,904 $9,057Current Portion of Borrowings $1,512 $2,164 $4,563 $4,550 $2,121 $1,825 $1,531 $892Unearned Royalties and Other Advances $3,389 $3,533 $3,927 $4,198 $4,357 $4,583 $4,692 $4,837Total Current Liabilities $11,704 $13,292 $16,334 $17,028 $14,964 $15,218 $15,128 $14,786Borrowings $12,776 $12,631 $12,773 $13,519 $18,013 $21,116 $24,082 $27,384Deferred Income Taxes $4,050 $4,098 $4,051 $4,051 $4,051 $4,051 $4,051 $4,051Other Long Term Liabilities $4,561 $5,942 $6,369 $7,439 $8,985 $10,475 $12,092 $13,687Long-term Liabilities $21,387 $22,671 $23,193 $25,009 $31,049 $35,642 $40,226 $45,122Total Liabilities $33,091 $35,963 $39,527 $42,037 $46,013 $50,860 $55,353 $59,908

Shareholders' EquityPreferred Stock, $0.01 par value $0 $0 $0 $0 $0 $0 $0 $0Common Stock, $0.01 par value $33,440 $34,301 $35,122 $35,122 $35,122 $35,122 $35,122 $35,122Retained Earnings $47,758 $53,734 $59,028 $66,218 $73,270 $80,987 $89,190 $97,758Cumulative Translation & Other ($1,187) ($1,968) ($2,421) ($2,421) ($2,421) ($2,421) ($2,421) ($2,421)Treasury Stock, at cost ($34,582) ($41,109) ($47,204) ($55,204) ($65,204) ($77,204) ($89,564) ($102,295)Shares held by TWDC Stock Compensation Fund $0 $0 $0 $0 $0 $0 $0 $0Total Shareholders' Equity - DISNEY $45,429 $44,958 $44,525 $43,715 $40,767 $36,484 $32,327 $28,164Non Controlling Interest $2,721 $3,220 $4,130 $4,130 $4,130 $4,130 $4,130 $4,130Total Equity $48,150 $48,178 $48,655 $47,845 $44,897 $40,614 $36,457 $32,294Total Liabilities & Shareholders' Equity $81,241 $84,141 $88,182 $89,882 $90,910 $91,474 $91,810 $92,203


27 October 2016


Key ChartsFigure 36: Disney Revenue 2016E Figure 37: Disney Operating Income 2016E

Cable Networks29%

Broadcasting12%

Theme Parks & Resorts30%

Studio Entertainment17%


10% Interactive Media2%

Cable Networks42%

Broadcasting7%

Theme Parks & Resorts20%

Studio Entertainment18%


12%Interactive Media

1%


Figure 38: Disney segment revenue trend 2005-17E Figure 39: Disney segment EBIT trend 2005-17E

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

Cable Networks Broadcasting Parks & Resorts Studio Entertainment Consumer Products & Interactive Media

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

Cable Networks Broadcasting Parks & Resorts Studio Entertainment Consumer Products & Interactive Media


Figure 40: Disney Cable Networks Revenue Mix 2005-20E

Figure 41: Disney average license fee per sub. Per month 2004-15

$0

$5,000

$10,000

$15,000

$20,000

$25,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Affiliate fees Advertising revenue Other revenue

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

ESPN ESPN 2 ESPN News ESPN U ESPN Classic Sports

Source: Company data, Credit Suisse estimates Source: SNL Kagan, Credit Suisse estimates

27 October 2016


Segment LTM OI and marginsFigure 42: Disney LTM Cable Networks operating income

Figure 43: Disney LTM Cable Networks operating income margin

$0

$1,000

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Cable Networks

36%37%38%39%40%41%42%43%44%45%46%

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Cable Networks

Cable Networks


Figure 44: Disney LTM Broadcasting operating income

Figure 45: Disney LTM Broadcasting operating income margin

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Broadcasting

0%

2%

4%

6%

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18%

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Broadcasting

Broadcasting


Figure 46: Disney LTM Studio Entertainment operating income

Figure 47: Disney LTM Studio Entertainment operating income margin

$0

$500

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$1,500

$2,000

$2,500

$3,000

3Q09

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0%

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27 October 2016


Figure 48: Disney LTM Parks operating incomeFigure 49: Disney LTM Parks operating income margin

$0

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$3,000

$3,500

$4,000

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Parks & Resorts

Parks & Resorts

8%

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18%

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22%

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Parks & Resorts

Parks & Resorts


Figure 50: Disney LTM Consumer Products and Interactive Media operating income

Figure 51: Disney LTM Consumer Products and Interactive Media operating income margin

$0

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$1,500

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$2,500

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27 October 2016


Companies Mentioned (Price as of 26-Oct-2016)21st Century Fox Inc. (FOXA.OQ, $26.4)AT&T (T.N, $36.43)Alphabet (GOOGL.OQ, $822.1)Amazon com Inc. (AMZN.OQ, $822.59)Apple Inc (AAPL.OQ, $115.59)CBS Corporation (CBS.N, $56.78)Charter Communications Inc. (CHTR.OQ, $248.64)Comcast Corporation Inc. (CMCSA.OQ, $62.56)DISH Network Corporation (DISH.OQ, $58.23)Discovery Communications (DISCA.OQ, $26.44)Netflix, Inc. (NFLX.OQ, $126.97)Nielsen Holdings (NLSN.N, $45.78)Scripps Net Int (SNI.OQ, $65.89)Sony (6758.T, ¥3,325)The Walt Disney Company (DIS.N, $93.49, OUTPERFORM, TP $125.0)Time Warner Inc. (TWX.N, $88.7)Twitter (TWTR.N, $17.29)Verizon Communications Inc (VZ.N, $47.63)Yahoo Inc. (YHOO.OQ, $42.08)

Disclosure AppendixImportant Global Disclosures I, Omar Sheikh, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for The Walt Disney Company (DIS.N)

DIS.N Closing Price Target Price Date (US$) (US$) Rating 08-Nov-13 68.58 73.00 O 11-Dec-13 70.52 80.00 03-Mar-14 79.46 NR 02-Jun-15 110.75 130.00 O * 10-Aug-15 111.00 120.00 10-Nov-15 117.42 130.00 11-May-16 102.29 128.00 * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price DIS.N

01- Jan- 2014 01- Jan- 2015 01- Jan- 201660

85

110

135

O U T PERFO RMN O T RA T ED

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activitiesAs of December 10, 2012 Analysts’ stock rating are defined as follows:Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time.Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

27 October 2016


Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings DistributionRating Versus universe (%) Of which banking clients (%)Outperform/Buy* 55% (54% banking clients)Neutral/Hold* 30% (24% banking clients)Underperform/Sell* 15% (40% banking clients)Restricted 0%*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.htmlCredit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and RatingValuation Methodology and Risks: (12 months) for The Walt Disney Company (DIS.N)

Method: Our $125 target price for Disney is 12.3x our 2017E EBITDA, and is supported by the strength of the movie slate and the recent launch of Shanghai Disney. Our target price and Outperform rating are supported by our discounted cash flow valuation, which uses a 2% terminal growth rate and a WACC of 7.3%.

Risk: Risks to our $125 target price and Outperform rating for Disney are (1) failure of key movie properties, including the new Star Wars movies and spin-offs to perform in line with our expectations; (2) failure of Shanghai Disney to meet our atttendance expectations; (3) higher than expected acceleration of cord-cutting/shaving.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (DIS.N, TWX.N, T.N, NFLX.OQ, AAPL.OQ, AMZN.OQ, NLSN.N, CMCSA.OQ, CBS.N, FOXA.OQ, 6758.T) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.Credit Suisse provided investment banking services to the subject company (DIS.N, TWX.N, T.N, AAPL.OQ, CMCSA.OQ, CBS.N, FOXA.OQ) within the past 12 months.Credit Suisse has managed or co-managed a public offering of securities for the subject company (DIS.N, TWX.N, CMCSA.OQ, CBS.N) within the past 12 months.Credit Suisse has received investment banking related compensation from the subject company (DIS.N, TWX.N, T.N, AAPL.OQ, CMCSA.OQ, CBS.N, FOXA.OQ) within the past 12 monthsCredit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (DIS.N, TWX.N, T.N, NFLX.OQ, AAPL.OQ, AMZN.OQ, NLSN.N, CMCSA.OQ, CBS.N, FOXA.OQ, 6758.T) within the next 3 months.As of the date of this report, Credit Suisse makes a market in the following subject companies (DIS.N, TWX.N, T.N, NFLX.OQ, AAPL.OQ, AMZN.OQ, CMCSA.OQ, CBS.N, FOXA.OQ, 6758.T).Credit Suisse has a material conflict of interest with the subject company (FOXA.OQ) . An Officer or Director of Credit Suisse is a Director of 21st Century Fox Inc. (FOXA)For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=265721&v=-3w3nv5c1p57kgfjp3h0s04uoh . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

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27 October 2016


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27 October 2016


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