Disney: The Happiest Place on Earth?
Walt Disney is one of the most recognised global brands in the entertainment industry, through its far-ranging media and film interests and global theme parks. Brands include Walt Disney World; Disneyland; Walt Disney Studios; Pixar; Disney +, ESPN and Hulu. Whilst the theme park division suffered significantly during the Covid lockdowns, Disney’s media interests, in particular the Disney+ streaming service, enjoyed strong subscriber growth off the back of significant investment in programming, as well as its deep and expanding library, boosted by the 2017 $71bn acquisition of 20th Century Fox. As lockdown restrictions have been lifted more recently, visitor numbers to Disney’s theme parks, including the flagship Disney World in Florida, have been running at or above 2019 pre-pandemic levels. Despite continued operational resilience, Disney’s share price has been a significant faller over the past 12m, even compared to the broader market, losing more than half its value since early 2021. This is partially on concerns over heavy investment in its currently loss-making Disney+ offering, with rivals such as Netflix suffering significant reversals of pandemic era subscriber growth in an increasingly crowded market. Recent high-profile political wrangling with the Governor of Florida and senior management upheaval, with the dismissal in June of head of the entertainment division, Peter Rice, have also impacted sentiment.
Disney reported Q2 results in May which saw revenues increase 23% to $19.25bn, with underlying earnings per share up 37% to $1.08. Whilst these group numbers were slightly behind consensus of $20.1bn and $1.19, Disney+ did deliver a stronger than expected 7.8m subscriber additions, driven by international markets ex-US, to give a total of 137.7m. Across all its direct-to-consumer platforms, which also include ESPN and Hulu, Disney now has over 205m subscribers, although losses increased by $0.6bn to $0.9bn, reflecting continued investment in content. This led to a 32% decline in operating profit to $1.9bn from the Media and Entertainment division. The Disney Parks division more than doubled revenue to $6.7bn and having made a loss in Q2 2021, recorded a profit of $1.76bn, as guests returned post lockdown, although park closures in Hong Kong and Shanghai will have an impact in Q3. In June Disney paid some $3bn to retain the TV rights for the Indian Premier League in cricket, although it lost the streaming rights which went for a slightly higher price. The IPL attracts huge viewing figures amongst India’s 1.4bn population, with Disney+ Hotstar having some 50m subscribers from the region, although revenue per subscriber is relatively low. “Lightyear”, a prequel to Pixar’s successful “Toy Story” franchise opened late June in cinemas to disappointing box office receipts. Disney announces Q3 results on the 12th of August.
The dramatic decline in the Disney share price since they peaked at over $200 in Q1 2021 on investor enthusiasm for companies seen as benefitting from post-vaccine re-opening, has also led to a significant derating. Currently the shares stand on a forward price to earnings ratio of 19.8X compared to their five-year average of almost 29X. Up until the pandemic Disney had a record as a consistent dividend payer, albeit it offered relatively modest yield typically around 1.5%. The dividend was suspended in 2020 however and has yet to be reinstated, although it is forecast to return to paying a cash dividend in 2023. Having suffered a sharp decline in profitability over the two years to end September 2021, Disney is now forecast to return to strong earnings per share growth over the next couple of years, which would have the price to earnings ratio multiple falling to around 14X for 2025 if these forecasts are met.
Disney’s share price is currently trading some 10% below its level 5 years ago. The company has been caught up in political controversy recently over its initial silence on, then opposition to, a controversial schooling bill in Florida relating to sexual education, putting significant pressure on CEO, Bob Chapek, who was appointed to the top job in early 2020. Chapek has also been criticised over changes to the pricing structure of the entertainment parks, the division he previously headed. Viewed in operational terms however, Disney continues to perform strongly across both its main divisions. Park attendance levels are back to pre-Covid levels and recent easing of travel restrictions to the US should encourage the return of higher spending international visitors. In streaming, Disney+ has so far avoided the collapse in subscriber numbers suffered by Netflix, adding almost 8m new customers in Q2, versus the latter’s loss of 200K subscribers. Disney also has a strong balance sheet which facilitates ongoing investment in the business. We view the recent early signs of price recovery off support levels as an opportunity to invest in a global leader in entertainment at a reasonable valuation level.
James Buckley is a Senior Equity Research Analyst with Cantor Fitzgerald Ireland.