Challenging the Entertainment Giant
It seems counterintuitive, to some extent, that Walt Disney Company stocks trade near an all-time high considering that due to the COVID-19 pandemic a huge chunk of its most important free cash flow contributors like its Theme Parks and Resorts, Cruise Lines, Cinemas, Sports Programs have been hit terribly hard. Amid closed parks and very limited sports programs for several months and huge uncertainties with regard to future developments, The Walt Disney Company had to report very rare Quarterly Losses in 2020, take on significant debt, stopped its share repurchase program, and eliminated its shareholder payouts.
So, all things no shareholder likes to see, but Walt Disney Company stock dynamic seemed completely unimpressed of these negative effects, in fact, after crashing from around USD 140 down to roughly USD 85 in March 2020, the shares of the media giant recovered nicely, doubling in a matter of just a couple of months.
So, why are investors loving stocks of The Walt Disney Company?
Because The Walt Disney Company – already being a dominant Media Giant – is on the rise to become even significantly stronger, more robust, more diversified, and more profitable in the next few years to come. Its already huge economic moat will become wider and broader. In fact, we believe, that The Walt Disney World Company is the one and only 100 years old business in the world, capable of growing at a double-digit range over the next decade.
So, let’s put the facts together:
- Despite the huge challenges amid the pandemic, Disney’s strong balance sheet remained intact.
- The company preserved huge amounts of cash through savings programs (halting capital spendings for parks, reducing investments in film and TV contents etc.) over several of its business segments plus by eliminating the cash dividend to shareholders
- Awashed in cash, at the same time, Disney has been investing massively into very promising areas whereas the flagship is Disney Plus Streaming Service which added over 80 million subscribers so far since its launch early in 2020. That’s by far surpassing any expectations in just its first year.
- The pandemic forced the company to focus on leveraging its unique market position with the stronges brands and a massive IP-library and bring all its resources into innovation and new project. For instance, the company plans to launch another Streaming Service called Star.
- As a 100 year old company, well established, with shareholders accustomed to regular und growing stock repurchase programs and dividend payments, the Covid-19 pandemic opened a rare opportunity to redirect these resources into growth initiatives. Without the pandemic and the huge pressure, shareholder would have been adamant accepting such a major strategic shift of the company.
Disney is both – a reopening AND a lockdown play
The Disney Company now combines the best of two worlds. Its new streaming services (Disney + etc.) establish huge and profitable cash generators and reduce Disney’s traditional cyclicity. For instance “traditionally”, recessions immediately drive down theme park attendance. Due to its streaming platforms, the business model will become more stable, more like a consumer staple company (such as PepsiCo) but with significantly stronger growth potential.
We all know Disney characters such as Mickey Mouse, Donald Duck, Arielle, or Marvel-Heroes such as Spiderman. We all know Disney Movies. But if you take a look at the company’s financial reports you can immediately see, where the company will earn really big money once the world has recovered from the pandemic and once the streaming platforms will throw out huge chunks of cash flow.
Its segment Media Networks, traditionally accounting for more than 50 % of the company’s profits: this is – by far – the largest segment including television stations, Disney channels and ESPN, the Entertainment and Sports Programming Network. ESPN broadcasts sports content (football, baseball, soccer, etc.) around the clock. The contribution of ESPN to Disney’s income has been substantial over the last years, but the services have seen some challenges such as losing subscribers and high programming costs at ESPN.
Parks, Experiences, and Products “traditionally” account for roughly one-quarter of the company’s bottom line, it’s the second-largest segment and includes ten theme parks around the world such as Disney Parks in Paris, Hong Kong, and Shanghai. As several of the theme parks had to be closed or operated at reduced capacity in 2020 due to the COVID-19 pandemic, this segment was hit extremely hard. But don’t let’s forget, that prior to the pandemic, Parks, Experiences, and Products have been one growth engine of The Walt Disney World Company and it will obviously resume being so, once the situation improves.
Studio Entertainment, accounting for less than 20 % is the company’s third-largest segment. It’s the segment the majority of people associate the Brand DISNEY with, it’s here where the company distributes films under Walt Disney, Pixar, Marvel, Touchstone, and Lucas Film, etc. Of course, this segment has been hit by the pandemic, but recovery is here well on its way.
Direct-to-Consumer & International “traditionally” accounts for less than 10 % of the business’s bottom line. This fourth largest segment licenses well-known Disney brands (such as Mickey Mouse, Donald Duck, Marvel, Star Wars, etc.) and creates and licenses games (for consoles, mobile devices, etc.). But the best is yet to come through its services Disney +, ESPN +, Hulu, etc. Revenues from strong subscriber growth have been offset by high costs in connection with programming and the international roll-out. There are plenty of countries where Disney + has not yet been launched. In just a few years, the segment Direct-to-Consumer & International will likely become the second or third largest of the company. It could have the same effect as if the Netflix company was directly added to The Walt Disney Company’s bottom line. So it’s really expected to be huge.
In our view, shares of The Walt Disney Company belong to the top 100 assets in the world. For decades and decades, this enterprise has been extremely good at creating wealth with astonishing earning growth during the last decades. Disney has a strong and durable brand-based competitive advantage. Could you name many companies having such well-known brands? There are very few you would be able to list (e.g. LVMH, Nestle, Coca-Cola, P&G, Unilever, J&J, and PepsiCo).
The Disney empire is huge and very diversified, and there are so many catalysts for future growth. We see companies like Disney as compounding cash machines having thousands and thousands of sources of income streams being reinvested and diversified in new business areas.
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