Disney (NYSE: DIS), the media-entertainment colossus, has struggled in recent years, thanks mostly to the demise of cable TV service.
The old ways guaranteed Disney steady revenue from its sports and entertainment content, but now Disney has to deal with the brave new world of cord-cutting.
Its stock has generated a total return of negative 6.4% for the past year, a positive annualized return of 9% for the past three years (far behind the S&P 500), and a negative return of 9.4% for the last five years.
Still, the company looks like it is now adjusting well, with a solid video streaming service and a booming Experiences division. Many analysts see good things ahead for Disney, the home of Mickey Mouse.
“The firm’s ownership of timeless characters and franchises attract customers to its unique parks and cruises and enable it to create popular content,” Morningstar analyst Matthew Dolgin wrote in a commentary. “That protects it in an evolving media industry and makes Disney vacations irreplaceable.”
Succeeding with streaming
The new paradigm for providing TV content (streaming) will keep Disney’s profits below past levels in the sports and entertainment divisions, he said. But he still expect the company’s returns on invested capital to “comfortably” exceed its cost of capital over the next 20 years.
Disney has three divisions. Entertainment consists of film and television studios, TV networks, streaming platforms, music, and theater. Experiences encompasses theme parks, cruises & vacations, and consumer products.
Sports manages Disney’s sports broadcasting, streaming, digital media, and athletic facility assets. That mostly boils down to ESPN, the global leader in sports broadcasting.
The Entertainment unit accounted for 45% of Disney’s revenue in the nine months through June 27. Experiences accounted for 39%, and Sports accounted for 18%. (The total is greater than 100% because some of Disney’s fees count as negative revenue).
Many analysts say the Experiences segment has the most potential. Its revenue grew 10% in the latest quarter, accounting for 54% of operating profit. It’s benefiting from strong U.S. consumer demand for theme parks and travel.
Experiences seen as sweet spot
Dolgin offered particularly high praise for the division. “Disney’s irreplicable characters will continue to drive a healthy Experiences business that we estimate is worth nearly as much as the market values the whole firm,” he said.
Dolgin lays out a cogent explanation for why Disney has struggled in recent years and why those struggles may be over. “The pandemic depressed Disney’s parks and experiences earnings for several years,” he noted. “At the same time, Disney was investing heavily to expand its Experiences business — building new cruise ships and expanding parks.”
Meanwhile, the crumbling of traditional TV curbed revenue growth, and the buildout of streaming increased costs. But now, linear TV accounts for a much smaller share of Disney’s profit and is moving toward irrelevance, while streaming is finally kicking into gear after initial losses, Dolgin noted.
To be sure, Disney isn’t fully in the clear yet. Various news media reported last week that Disney is canning more than 300 workers, mostly in human resources and technology, after reportedly planning a layoff of at least 1,000 employees in April.
Josh D’Amaro, who took over as CEO from the legendary Robert Iger in March seeks “to streamline a sprawling operation full of fiefdoms,” as The Wall Street Journal’s Joe Flint and Ben Fritz put it.
Earnings look good, with revenue rising 7% in the latest quarter from a year earlier, and the total segment operating profit margin gaining to 22.01% from 19.34%.
So maybe Mickey Mouse is getting ready to roar.
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