On July 12th, Disney reopened Disney World to the public. Unfortunately, we have limited information about how many tickets were sold and what percentage of normal traffic is being experienced. All we know is it wasn’t a grand opening. Only two theme parks (Magic Kingdom and Animal Kingdom) were opened while the other two (Epcot and Hollywood Studios) will follow on July 15th.
Almost at the same time (July 13th), the Hong Kong Disneyland announced its closure as more covid-19 cases surge and two Division I conferences (Ivy League and the Patriot League) cancelled all fall sports (yes, including football). While cases are surging throughout the U.S., we can expect much uncertainty around amusement parks, movie theatres and cruises. Yes, those are all part of Disney’s income sources.
The Walt Disney Co owns the rights to some of the most globally recognized characters, from Mickey Mouse to Luke Skywalker. These characters and others are featured in several Disney theme parks around the world. Disney makes live-action and animated films under studios such as Pixar, Marvel, and Lucas Film and also operates media networks including ESPN and several TV production studios. Disney recently reorganized into four segments with one new segment: direct-to-consumer and international. The new segment includes the two announced OTT offerings, ESPN+ and the Disney SVOD service. The plan also combines two segments, parks and resorts and consumer products, into one. The media network’s group contains the U.S. cable channels and ABC. The studio segment holds the movie production assets.
Let’s use the canvas to see where we are at with this previously strong company.
Disney through the canvas
Disney was on a roll prior to the pandemic. Strong from the continuous success of its Marvel franchise and the evolution of the Star Wars trilogy, Disney did another masterful acquisition with the Fox assets last year. The creation of Disney + and ESPN + were also doing very well. The stock was set for a killer year in 2020.
The pandemic completely disrupted Disney’s business model. When you look at DIS 2019 annual report, you will note that each sector will be affected by the virus. Media networks will see less advertising revenue, ESPN will not present much sports, parks and cruises have been closed and popular movie releases have been postponed.
The company decided to preserve cash by suspending its dividend, saving $1.6B in cash quarterly. Since then, Disney has been working hard on solutions to reopen its parks ASAP (which is happening now), inked a deal with the NBA to create a “sports bubble” with ESPN sports center (cost for the NBA is expected to be around $150M) and releasing more content at Disney + (notably its new Pixar movie Onward). This is obviously not enough to compensate for the economic lockdown, but it shows Disney can go a long way towards keeping its business rolling.
I bet lots of people will anxiously wait for their next earnings report scheduled for August 4th. Management confirmed people were booking their Disney vacations for the rest of the year and the beginning of 2021. While the number of tickets hasn’t been confirmed yet, Disney affirmed it is “sold-out” for July. The sold-out mention would mean something if we had the actual percentage of capacity. Another thing that catches my attention is how fast Disney + is growing. After all, this may become their best asset 10 years from now.
Investment Thesis Before Covid-19
Through the acquisition of Pixar, Marvel and Lucas Film, Disney has built a never-ending universe of blockbuster movies. It pursued the same strategy when the company bought FOX’s assets; there’s already an Avatar section in its theme park. In late 2019, DIS successfully launched its streaming services; the company now counts over 50M subscribers signed up so far! We don’t see Disney competing against Netflix, but rather completing NFLX’s offering. Most families and sports enthusiasts will likely pay an extra $10 a month to access more content and keep both DIS and NFLX.
Disney is still sitting on numerous growth vectors. If it was any other company in the same industry, I would probably tell you it’s a lost cause and that you better move on and sell your shares (Six Flags anyone?). But because Disney shows over $100B in goodwill on its balance sheet, you can expect the company to use its assets to generate more income in the future. Such an astronomic amount would look ridiculous on many balance sheets. However, considering brands like ESPN, Marvel, Star Wars, Pixar, Fox assets and Princesses, I have no doubt it is worth a lot more if Disney were to divest them separately. This does not even count its growing streaming services. Netflix currently burns money and shows a market cap of $240B with 183M subscribers. Disney has now half of the NFLX subscribers (94.5M) and shows unmatched content creation abilities. Expect the gap in subscribers to narrow next quarter.
As you can see, there are no right or wrong answers while making assumptions. This is an art more than a science. However, it doesn’t mean you can’t clear up the noise and focus on facts. The first three questions of this canvas help you see things more clearly.
#1 You go back to your investment thesis and look at how the company was doing between Jan 2015 and Jan 2020.
#2 You identify how the coronavirus affected the company’s business model, and determine if this threat is a permanent disruption, partially permanent disruption (Disney or restaurants in malls) or a modest temporary disruption (utilities for example).
#3 You consider the company’s reaction. This will tell you a lot about management and what can be done going forward.
Once you have covered these three points, you are in a better position to judge what may happen next. Being able to more accurately describe where the company stands now will also aid in defining a clearer “new” investment thesis.
Finally, the only way a company can get out of this mess is by finding additional growth opportunities. If you can’t identify future growth vectors, this tells you the company may not be worth retaining in your portfolio. If you lose your job and can’t find a way to make your mortgage payment, you will have to consider selling the house before it’s too late. Please don’t wait until it’s too late.