For a change of pace, this month we take a look at, in our view, one of the most interesting media companies in the world. Disney, or The Walt Disney Company is known throughout the world for its theme parks and children’s cartoons. Yet the company is so much more than that in 2019. Disney may be the most important media company in the world given its ownership of leading brands, dominant position as a content provider and global scale.
Disney’s businesses are extremely diverse and include both traditional and modern networks including sports broadcaster, ESPN, ABC, FX and the Disney Channel. They also own a growing portfolio of Walt Disney theme parks and more recently cruise ships that offer families a unique holiday experience. Disney’s recent strength, however, has been in their Studio Entertainment division through which they identified the true value in the video-on-demand would be owning content rather than platforms. It is this unit that owns both the traditional Walt Disney studios, which includes movies like the Lion King and Aladdin, as well as the two most dominant franchise of all-time, being Marvel Studio’s and Lucasfilm. For the uninitiated, Marvel owns the content and has delivered several dozen super hero movies including the Avengers, Thor and Guardian’s of the Galaxy, whilst Lucas Film controls the all-time Stars Wars and Indiana Jones’ franchises. Finally, the company recently completed the acquisition of Twentieth Century Fox from News Corporation further extending their dominance. More recently, Marvel have announced an expansion to deliver their contact directly to consumers, similar to Netflix, with the global launch of both a Disney+ and ESPN+ streaming service just around the corner.
The company has been riding a wave of record revenue on the back of titles including this years Avenger’s: End Game topping the all-time list for ticket sales. The fourth quarter of 2019 was no exception with revenue of $20.25bn (up from $15.2bn) however the resulting earnings per share was impacted by the Fox acquisition, falling from $1.87 to just $1.35 this year. Management blamed the underperform of Fox Studio’s which can be taste driven and many years in the making for the earnings reduction of 0.60 cents per share compared to 0.35c expected. The release of Avengers and Toy Story 4 were not enough to offset the disaster that was XMEN: Dark Phoenix. Disney’s largest segment is however their television networks and theme parks which added revenue of $6.71bn and $6.58bn after years of capital expenditure adding new themes including a dedicated Star Wars park.
Disney’s only loss-making business, it’s direct-to-consumer streaming services offer the greatest potential in our view. The company recently acquired the popular Hulu streaming platform and is in the process of launching a dedicated sports streaming service, ESPN+, around the world as well as taking back control of their historic content database and launching a Disney+ TV and move subscription platform. This comes at an interesting time for the industry with many consumers now rationalising their subscriptions in light of diluting quality. The fact in Disney’s favour, however, is that they own two of the most valuable commodities in media. The first being live sports that consistently attracts strong advertising revenues and which is only becoming more popular. And the second is the quality of content and the ability to leverage this not into movies but into TV shows, theme parks, products and experiences. We understand ESPN is about to begin renegotiating its position with various cable TV providers and given its importance as an anchor to these services will result in better than forecast sales.
Given the potential growth and market position you would expect Disney to trade at a substantial premium to market, yet it’s historical P/E is only around 21 times earnings even with the stock up 24% this financial year. Much cheaper than the 90x hat Netflix trades on. It offers a yield of 1.3% and has aggressively been buying back stock at every opportunity.