Some updated thoughts on Disney which continues to be one of the hardest hit stocks in Focus Equity…
· Parks are shut down globally, they are seeing broad theater closures and professional sports in the US are halted. The impact of the virus should be temporary and not affect Disney’s long-term competitive positioning or brands. Overall, I think the price drop in Disney’s stock reflects mostly the impact to their Parks business, which is temporarily shut down. In terms of their other businesses (which I detail further below), ESPN is getting hit, but revenue is dominated by long-term affiliate fee contracts. Their Studio business can pivot by delaying releases or sending films straight to DTC to help mitigate the impact. And DTC is seeing a ramp in subscribers.
· Parks – Disneyland and Disney World will be closed indefinitely (mgmt.. previously said through 3/31). Parks/hotels/cruises may take longer to return to normal activity than other businesses. While China is returning to normal, Disney Shanghai only has some restaurants and shops open and Disney Hong Kong remains closed. They’ve furloughed a large portion of employees (labor is 40-50% of park expenses). Bob Iger recently talked about re-opening relying on the advancement of testing and contact tracing as that would be needed for consumers to feel comfortable returning to the parks.
· Media – This is their cable and broadcasting businesses. Profits in this segment are dominated by ESPN.
o ESPN is being impacted by a halted NBA and delayed MLB & MLS. Segment revenue is comprised of affiliate fees and advertising revenue. Affiliate fees are bigger than ad revenues and the NBA is far more significant than the other sports.
o The good news is that Disney makes most of its ESPN revenue from affiliate fees which are based on long-term contracts. Estimates are that they make $8-9/sub/month or ~$100/sub/year. They’ve been losing subs, but offsetting this with increasing prices (they can b/c live TV is increasingly important to the cable bundle). Subs are ~83m. So, a bit over $8B in affiliate revenue from ESPN. That’s over 10% of total company revenue.
o So right now, the biggest impact for Disney ESPN revenue is w/ a loss in NBA ad revenue. Estimates seem to range from a $400-$700m loss in ad revenue for Disney, with the NBA typically bringing in $900m-$1B in ad revenue annually for Disney. This makes sense given the NBA generates $600-$700m in ad revenue during the regular season and $800m-$950m during the playoffs. This is split between EPSN and Turner and the season was heading towards playoffs. All of that is assuming the NBA doesn’t re-start the season and play into the summer as they are hoping.
o In terms of costs, the entire NBA contract is $1.4B a year, which Disney may not have to pay all of…fees are weighted towards playoffs.
o So, the Media segment will be hit by a loss in sports ad revenues, with likely some offset in sports rights fees. Additionally, other cable and broadcasting will see an impact to their advertising revenue. In general, TV advertising is more contract oriented and cannot be toggled down as quickly as digital advertising.
· Studio – results will be weighed down by film production delays and theater closures. This segment is always volatile and they are lapping a strong 2019 film slate, so it was already expected to be down. Films can be released directly to DTC which should aid subscriber numbers. Halted production lowers spending.
· DTC & Int’l – Pre-announced better than expected subs of 50m. Consensus had been for 30m at the end of FQ2 and 40m subs by the end of F20. Recently launched in parts of Europe and India. Management’s original expectations were for 60m to 90m subs by F24. 2024 was also the targeted breakeven year. Clearly, they’re tracking ahead of that – breakeven likely to be 2022.
· Valuation & balance sheet:
o To put this in perspective, the stock is down nearly ~30% since the virus outbreak. As discussed above, I think the decline is mostly about their Parks & Experiences business which accounts for 31% of revenue.
o They recently raised $6B in new debt, bringing their cash balance to close to $13B. And they arranged an additional $5B credit facility. They are 2.6x levered as a result of the Fox acquisition. They were hoping to get under 2x this year, but that will be pushed out. They have enough liquidity to cover near term maturities.
o They pay almost $3B annually in dividends (~1.7% yield)…this could be temporarily halted to conserve cash as other companies have done.
o Disney reports results on May 5.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$DIS.US
[category equity research]
[tag DIS]