Walt Disney Company – NYSE:DIS

19/04/2020

Company Background: 

Disney is an American multinational mass media and entertainment conglomerate headquartered in Burbank, California.

Founding Date: October 16, 1923 

Since the 1980s, Disney has created and acquired corporate divisions in order to market more matured content than the one typically associated with its flagship family-oriented brands.

Currently, Disney is made up by ABC News / ESPN (80% stake). The Disney Channel, Disney Brand, Pixar, Lucasfilm, Marvel, BAM Tech, 21st Century Fox, Hulu (60% Stake), Disney Park and Studios…

What is the business of the company?

Divisions:

1) Walt Disney Parks and Resorts (Highlighting the company’s theme parks, cruise line, and other travel-related assets) include domestic and international theme parks and resorts (in Florida, California, Paris, Hong Kong, Shanghai and Tokyo), and the Disney Cruise Line. The revenue from this segment comes from the selling of tickets, food and articles in the parks and cruise packages. It also obtains revenues from sponsorships and co-branding opportunities, real estate rental and sales.

2) The Walt Disney Studios (Covering the company’s film, music recording label, and theatrical divisions) produces and acquires live-action, animated motion pictures, direct-to-video content, musicals recording and live stage plays. This business segment consists of the Walt Disney Pictures, Pixar, Marvel, Lucasfilm, and Touchstone banners. Sales are generated from the distribution of films, ticket sales, music distribution and licensing of Company intellectual property for use in live entertainment production. 

3) Media Networks involves the company’s television properties – ABC, ESPN and Disney Channel cable network, the television production and distribution operations, local broadcast radio networks and stations (ESPN radio and Radio Disney Networks), streaming services and innovative technology. Income is generated from affiliate fees, the sale to advertisers, and license fees for using television programming. 

4) Consumer Products and Interactive Media including toys, clothing, and other merchandising based on Disney, as well as including Disney’s Internet, mobile, social media, virtual worlds, and computer games operations, sell merchandise, games and books through its own retail stores, online, and wholesalers, and advertising in online video content. 

This segment includes the new streaming program Disney+, which has been launched in the US and Europe so far, having gained more than 65Mill subscriptions in 6 months.

A close up of a logo

Description automatically generated

Investment Thesis: 

Disney is a great business. Over the last ten years, its revenues increased more than 60% and its net income growth 230%. The cash flows nearly trebled and the number of outstanding shares diminished 17%. However, the pandemic has affected its Parks and Resort division, and it will be challenging to obtain a positive net income from this area until there is a vaccine for the disease. Nevertheless, the revenues from other divisions are going to be stable or even grow. It is the case of Direct to Consumer because of Disney+. This is the point where I see a great opportunity and I will explain in more details below.

Currently, Netflix is the leading player in this market. In fact, Netflix created the market. However, this market is ruled by content and Netflix cannot compete in the content against Disney. 

Combining ESPN, FOX and Disney Plus will allow the company to leverage its content and grow at a faster pace than Netflix. In addition to that, Disney already has a powerful brand and international recognition. Furthermore, Disney will not have the huge production cost that Netflix has because of the content creation is Disney and Fox actual business, so there are synergies.

Consequently, if we consider the current market capitalisation of Netflix ( $190 Billion) compared to the value of the entire Walt Disney Company ($184 Billion), someone who acquires Disney shares now, it would be acquiring Disney+, the potential successor of Netflix, and obtaining all the other Walt Disney businesses for free.

Obviously, this is not realistic due to the potential overvaluation of Netflix and the 3-4 years that Disney+ would need to reach Netflix current revenue. But it illustrates the situation.

Catalysts: 

The unprecedent growth of Disney+

  • Netflix alone has the same capitalisation as the entire Disney company. We have to admit that Netflix has 167 Mill subscriptions meanwhile Disney+ reached 50 Mill users by 8th April 2020. Nevertheless, Netflix launched its streaming service in 2011 and Disney dit it only six months ago.

Disney has a unique business model, a renowned brand and an unparallel Disney experience. These factors allow it to have high ROCE, and currently, it is trading at a relatively low price compared to historical data.

Valuation: 

  • The COVID-19 made Disney decide closings its thematic parks. We are assuming an 80% reduction in the revenue of the parks and resort segment (revenue in 2019 was $26.23 billion).
  • Disney’s direct-to-consumer business is expected to contribute $16.5 billion to Disney’s 2020 total revenue (thanks to Disney+).
  • Disney+ contribution is expected to grow 25% by 2021 and 7% for the next five years.
  • Walt Disney studios division revenue will be affected around 20% in 2020 due to the virus effect.
  • WACC 6.9%.
  • We assume a 40% decrement in Capex in 2020 compared to 2019. Reaching $4500 million by 2021 and increasing up to $5300 Mill by 2029.
  • SG&A decrement of $700 million in 2020.
  • Taxes 25.55%

Risks: 

  • Reduction in consumer demand for some Media Network content specifically declines in cable TV popularity among younger generations and households.
  • Slow recovering of the Parks and resort segment (2-3 years), maybe the capacity will be diminished.

Results:

Disney is a fantastic company with a bright future. We are taking a conservative valuation approach with the assumptions described in the valuation section. We find a target price of $128, which has a potential of 28% from the current level. 

We notice that this price is far below the price pre-COVID-19. However, we need to point out that the situation right now is very different than it was three months ago. As the revenues from its Park and resort division will diminish substantially in 2020 compared to previous years.

Annex:

A screenshot of a cell phone

Description automatically generated
A picture containing table

Description automatically generated

Disclaimer: This analysis is not a buy recommendation. It is only my point of view about the expected FCF of the company in the future with the information I have.