Walt Disney (DIS)

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WHAT HAS CHANGED?

  1. Impact of coronavirus outbreak

Disney stock has been badly impacted by the spread of the coronavirus pandemic. As of early May 2020, the stock was down by over 30% compared to its February highs. The media behemoth has had to close down its Theme Parks (which account for over 35% of total revenue) while also facing significant disruption to its TV and Studio operations. Disney noted that it would be issuing about $6 billion in debt to manage its liquidity, adding to its total borrowings of roughly $48 billion. The company's results for Q3 2020 confirmed this reality with a drop in revenues across its key segments and company reporting losses. However, the stock has recovered significantly and as of 28th June 2021, it is trading at $178, significantly above its pre-Covid levels. The sharp recovery was driven by gradual lifting of lockdowns, successful vaccine rollout and impressive performance of its streaming business.

  1. Update on the recent full-year earnings

Walt Disney reported total revenue of $65.4 billion in FY 2020, marking a decline of 6.1% over $69.7 billion in FY 2019. Lower revenue was mainly driven by sharp drop in revenues from Parks and Studio segments. Parks' revenue declined 37% while studio revenues saw a 13% decline year-on-year. This was driven by the lockdowns imposed following the outbreak of the pandemic, which led to parks being shut down and film shooting being halted. Media Networks revenue increased 14% due to the consolidation of 21st Century Fox. The biggest saving grace was the Direct-to-Consumer segment which recorded 81% growth in revenues due to the launch of Disney+ starting in November 2019, and the consolidation of Hulu. Disney reported a loss of $1.58 per share in FY 2020 against a profit of $6.64 per share in FY 2019.Earnings deteriorated sharply because of lower revenue and higher cost of services on account of an increase in programming and production costs. The pandemic has significantly affected Disney's business with streaming business being the primary factor to offset the impact of coronavirus.

  1. Introduction to a separate revenue stream from video streaming
Disney bought a 75% stake in BAMTech, a video streaming company originally created by Major League Baseball, to create an ESPN-branded, over-the-top video streaming service. ESPN+ was launched in April 2018 for an annual membership of $49.99 or $4.99 per month. This service offers scores and highlights along with streaming of channels for cable subscribers, and the ability to subscribe to live events. Currently, ESPN+ boasts more than 2 million paid subscribers. Disney also launched its Disney+ streaming service for subscription fees of $7 a month or $70 a year in November 2019. This service has a vast library of Disney's and Fox's legacy content as well as new, exclusive TV shows, movies, and documentaries.

  1. Q2 2021 earnings
Disney reported total revenues of $15.6 billion in Q2 2021, reporting y-o-y decline of 13.3% as results were adversely impacted by the novel coronavirus. The most affected business segment was the Disney Parks, Experiences and Products, as most of the parks and resorts have been closed or operating at significantly reduced capacity. EPS in Q2 2021 doubled to $0.50 from $0.25 in the prior-year quarter due to reduced cost of products and lower tax expense.

  1. Launch of Disney Plus
Disney launched its own streaming service - Disney Plus - in November 2019. At $7 per month, Disney+ is in direct competition with industry leader Netflix and the various other direct-to-consumer streaming video platforms currently available and in development. It does not have as many movies or television shows as Netflix, but Disney hopes to draw customers in with lots of high-profile exclusive content and nearly every movie in Disney’s expansive library, including a number of previously hard-to-find animated features and live-action Star Wars and Marvel Cinematic Universe spin-offs. Disney+ is available on iOS, Apple TV (tvOS), Google Chromecast, Android, Android TV, PlayStation 4, Roku, and Xbox One at launch.

  1. Spectacular Launch of Disney Plus
Disney announced that Disney+ has 26.5 million paid subscribers by the end of Q1 2020, topping the company’s own highest expectations. 50% of Disney+ subscribers came via disneyplus.com, where the company doesn’t share revenue with others, while 20% from Verizon and the rest from other services like iTunes. Disney+ is expected to debut in India via Disney’s Hotstar on March 29, 2020. In addition to India, the service will also debut in key European markets in March.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Disney is a well-diversified media company and a small change in a single business driver does not hold much significance from a value standpoint. However, the drivers mentioned below are one of the most important and sensitive drivers for Disney's value.

  • Per Capita Guest Spending at U.S. Theme Parks: We estimate this figure will increase from about $184 in fiscal 2020 to around $230 by the end of our forecast period. However, there could be a downside of a little under 5% to our price estimate if this spending were to remain rangebound around $200 levels. This could happen if other theme parks compete effectively, challenging Disney's domination, bringing down the guest spending.
  • Cable Networks EBITDA Margin: We estimate this figure will increase 300 basis points to 55% by the end of our forecast period from 52% currently. However, there could be a downside of about 5% to our price estimate if the margins were to decline sharply towards 40%. This is possible given the rising programming costs and continued growth of digital platforms, which could result in continued investments in new programming. However, if Disney manages to rebound its margins to over 60%, it will result in an upside of over 5% to our price estimate for Disney. This is also possible if the company manages to control the programming costs with continued growth in monthly subscription fees.

For additional details, select a driver above or select a division from the interactive Trefis split for Disney at the top of the page.

BUSINESS SUMMARY

Disney is a diversified media company and makes money through several businesses including cable networks, broadcasting network, theme parks & hotels, filmed entertainment, and consumer products. The company has also added a direct-to-consumer business to its portfolio of late.

Its cable networks include channels such as ESPN, the Disney Channel, ABC Family, and others. Disney's broadcasting arm, ABC Network, is one of the biggest broadcasting networks in the U.S. with a wide viewership.

Apart from TV networks, Disney boasts of several theme parks and resorts that attract millions of visitors every year. Furthermore, the company leverages its famous characters and brands to sell a variety of merchandise. Its filmed entertainment unit produces and distributes movies under the Disney Studios brand.

Disney has been witnessing a slowdown in its media networks division of late; for instance, ESPN has lost more than 11 million subscribers over the past six years due to the emergence of alternative viewing platforms. At the end of fiscal 2018, Disney reported the lowest number of ESPN subscribers in the last 10 years at 86 million. However, Disney is adapting to changing consumer habits and evolving technology shifts to seek new revenue streams.

SOURCES OF VALUE

We believe Cable Networks are the most valuable divisions for the following reasons:

High Cable & Satellite Operator Fees

Cable and satellite companies such as Comcast and DirecTV pay Disney to include its cable channels, such as ESPN, Disney Channel, ABC Family, and others in their programming packages. These operators pay a handsome amount of fees for ESPN (~$7.50 per subscriber per month) and for Disney Channel (~$0.94 per subscriber per month). The high amount of fee charged along with high ad pricing that results in healthy ad revenues make ESPN, and other cable networks, most valuable to Disney.

High Penetration Of Cable Networks

Along with the high fee charged, Disney's cable networks such as ESPN and Disney Channel have high penetration. ESPN and Disney Channel are present in approximately 95% of the U.S. pay-TV households.

KEY TRENDS

Increasing Pay TV Competition

Increasing competition among pay-TV providers, such as Comcast, Time Warner, DirecTV, AT&T, and Verizon is favorable for media companies including Disney, which can gain negotiating power in discussions regarding the pricing of subscription fees for their programming content.

Increasing Sports Programming Costs

ESPN increases its fee per subscriber every year, owing to a rise in sports programming costs which have become a cause of worry for pay-TV service providers. Some of them are considering dropping ESPN from lower-priced programming packages.

Declining DVDs And Expanding Streaming

As a result of the growth of rental companies and online video, DVD sales have suffered declines in recent years causing worry to media companies such as Disney. However, these media companies are now pushing for rental window and licensing of their older content to recoup lost profits.

Online Licensing & Broadcast Advertising

With the growth of online streaming companies such as Netflix that monetize primarily older content, licensing opportunities have expanded for media companies. However, given a decline in traditional television viewership, ratings are hit hard and this has resulted in lower advertising revenues for most of the media companies. So far, licensing revenue growth has not been able to completely offset the declines seen on the advertising front. Having said that, broadcasting networks, such as FOX, CBS, NBC, and ABC have been able to contain the advertising decline due to their exposure to sports programming, which garners very high viewership and better ad pricing.

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