Is Disney Safe?
Disney (DIS) stock has fallen about 40%, from a high around $151 in November 2019 down to $94 today.
Yesterday, I wrote that now is the time to upgrade your portfolio.
Is Disney a good candidate for this?
Is Disney safe?
Only you can answer that question. What I have learned about investing is that investing is very personal. Two people evaluating the same investment opportunity, with the same facts and information, may come to very different conclusions.
But let’s take a closer look at Disney.
Disney Is A High Quality Business
Disney has the following assets.
Intellectual Property
Disney is the King of Characters & Content: Marvel, Pixar, Star Wars… no one else comes close. This part of the business is amazing: “[Disney’s IP is] like an oil well, where all the oil seeps back in” -- Warren Buffet
IP drives attendance at Theme Parks
IP drives merchandise sales
IP drives Movie content
IP drives significant mindshare and of course Brand affinity
Disney is one of the world’s most recognized brands.
Theme Parks
This is a good business.
Disney’s theme parks pretty much have no competition. The closest competitor is Universal, but I’d argue Disney appeals to a different group of customers.
Attendance at theme parks is driven by unique IP so Disney has wonderful Pricing Power and can charge high prices and thereby have high margins.
Lastly, starting a theme park is neither easy (think permits) nor cheap (high-fixed costs) so well protected from future competition.
ESPN
Pretty much the de facto sports channel. Makes money from affiliate fees and advertising, which has made ESPN a high margin cash cow.
Sports is one of the major reasons why people continue to pay for cable today. ESPN and hence Disney benefit from that.
That said, this is a business in secular decline as people continue to cut the cord and forgo their cable subscriptions.
Disney Plus
Streaming is a new growth business for the company with the potential to strengthen their direct to consumer relations and for high margins down the line.
This includes Hulu which is majority owned by Disney.
Unless Disney seriously mis-executes, looking out 5 years, I certainly view Disney+ as being a leader in the streaming wars.
Disney Concerns
Theme Parks
At the moment,
Covid-19 means Zero attendance / Zero revenue.
That said, so far Disney has not furloughed employees.
As a result, operating leverage is working against Disney - high fixed costs of operating the parks (labor is a big component of that) are resulting in big losses, at least for now.
Longer term:
As long as there isn’t a major change in consumer behavior (eg: comfort with large crowds/gatherings etc), I suspect attendance should return to normal at some point. That said, it may take a while before foot traffic gets back to where it was prior to the virus outbreak.
This will depend on how quickly the economy/jobs come back (Going to a theme park isn’t cheap at over $100/day per person… plus travel plus lodging!).
Disney’s regular price increases will likely need to wait.
ESPN
Possible short term pain:
Although this is a cash cow for the company, the current business model is at risk. The move away from cable is real - people continue to cut the cord.
Now that all major sporting events are also cancelled, could this accelerate cord cutting?
If that happens, this could hurt ESPN’s advertising revenue as well.
Long term stable
Sports will come back and ESPN will continue to transition to streaming → ESPN Plus is a necessity for Disney+.
Intellectual Property
Short Term:
Today, movie theatres are closed so Disney can't make money from this channel. Disney usually releases movies in theatres before making them available via Disney+ thereby capturing more of the demand curve. This is not an option at the moment.
Movie filming has also been pushed back. This will create some short term pain.
Longer Term:
Disney’s content library is unmatched and should continue to resonate well with consumers once the virus passes.
In fact, the scarcity effect from this hiatus may in fact create more short term demand. I for one will continue to look forward to their next Marvel movie release (although not sure I’d watch it in a movie theatre!).
Disney Plus
This part of their business is likely very strong during the current crisis. Entertainment in this form is relatively low cost for families, particularly to those hurt by the current lack of employment opportunities.
Separately, for stressed out parents working from home, I imagine Disney+ content is a godsend and keeps their kids occupied.
Longterm, this is an area of growth for the company, and should be a wonderful profitable to new line of business for the company. That said, the company will need to learn to operate more like a technology company to harness the power of streaming. I am confident they can.
We haven’t discussed Disney’s cash holdings and its debt obligations. What we do know is the company did easily raise $6B in debt in March. This should give potential investors comfort in the company’s staying power, considering the near term impact on its business. Of course, a more detailed analysis / estimation of the company’s near term expenses would also be useful.
The above should give you a sense of Disney's different lines of business, and how they may be impacted both in the near term and the long term. It’s clear the near term impact of covid-19 to Disney is significant. But it’s unclear how long lockdowns will last, and how consumer behavior may change because of it (if at all).
Hopefully, this helps you assess whether Disney is safe.
Is Disney a company you can develop conviction in?
Email me back, and tell me why or why not?
Strong buy!