Disney's Stagnant Year Ahead
Summary
- Disney will, at best, have a stagnant year thanks to the coronavirus.
- Worst case scenario is still up in the air. If things continue to get worse on the virus front, Disney may have serious issues to face this year.
- Studios were set to have a worse year without virus concerns. Those concerns now multiply issues in that segment.
- The Disney+ segment will hit $20B in revenues, but will still have operating losses.
Just over a month ago, I had another Disney (NYSE:DIS) article published on Seeking Alpha. I was bullish on the stock, and I had no real concerns for the future, things were looking great. I wasn't completely ignoring the COVID-19 risks, but I think I might have vastly understated them.
At the time, Disney estimated the costs as a result of the coronavirus to be in the realm of $175M. A good hit, but for a company with operating income close to $12B in 2019, manageable. Now, however, I think investors should have cause for concern. The hit will, at a minimum, leave Disney with no growth in 2020.
A Breakdown of Disney's Revenues
Image: Information from Disney 2019 10K
The chart above offers a breakdown of Disney's revenues. A combination of coronavirus fears, park closures, cord-cutting, and a much slower year at the box office will leave Disney sitting stagnant this year. Their only saving grace, direct-to-consumer.
Park closures and general public fears about going to parks will result in the parks segment giving up more than half of its operating profits when comparing FY20 to FY19. Cord-cutting is also accelerating, and Disney has a smaller box-office slate this year. That smaller slate comes at a time when countries, like China and Italy, are closing cinemas as part of quarantine procedures.
Park Closures & Cruise Reductions
Image: Information from Disney 2019 10K
Last year, Disney generated roughly $19.8B in revenues from Parks & Experiences (leaving park licensing aside -- Tokyo Disney). While U.S. parks are currently alive and well, Disney parks in Hong Kong and Shanghai remain closed with no signs of reopening.
Disney cannot let all the staff go, and must incur at least some costs to maintain the parks, hotels, and related experiences. However, revenues have sharply dropped to, or near, zero. The parks will reopen, but how long will the public's appetite for crowded public spaces remain downtrodden?
Disney offers a breakdown showing that international revenues make up ~$4.22B of the Parks, Experiences, and Products division. This is a small bite of Disney, but it's likely to be a small bite that will all but vanish (aside from Paris) in the current quarter.
A $2B reduction in revenues from international parks and experiences (a little less than 50%) over the current fiscal year will result in the $507M of net income it produces being wiped out. There will be cost savings in not having to pay hourly employees, but the hit will be big enough to give international parks and experiences a losing year in FY20.
At this time, the domestic market is still up in the air. Demand doesn't seem to have waned in these first few months of the year, but the virus is rapidly developing, and so is the fear. Should the parks remain open, I believe attendance will drop. Fears of a recession may also cause attendees to limit spending. Regardless, I do not foresee Disney maintaining the $4.4B of operating income that was generated by domestic parks & experiences in 2019.
Then there are the cruises. Disney hasn't had an outbreak like those seen on Carnival's (CCL) Princess cruises, but it will still be tarred with the same brush. It's not a stretch at this point to see a moratorium on the cruise industry. Moratorium aside, demand will almost certainly see a significant decline in the near-term.
Studios
Last year Disney had numerous blockbusters that brought in $11.1B. There was an Avengers movie, a remake of The Lion King, and the final installment of Toy Story, to name a few. Thanks to a staggered fiscal year, Disney will include the sequel to Frozen and the last episode of the Star Wars saga in 2020's earnings, but the rest of this year's slate does not look quite as promising.
We also need to acknowledge that a majority of cinemas in China are closed. Disney aside, China has seen a precipitous $1.91B drop in box office revenues in 2020 when compared to the same timeframe last year. This, of course, does not bode well for the already slim year Disney was planning.
Image: Release dates per IMDB, estimated box office my own from comparables
The numbers above are my assumptions for Disney "blockbusters" this year. Onward, the company's most recent release this past weekend, had a $12M opening day on Friday and a $40M weekend. These numbers are slightly better than those of The Good Dinosaur, but lower than say, Brave, which did open in the summer. Onward will likely go on to provide a $350-400M worldwide take.
Image: Rich Greenfield, Twitter
The Studio Entertainment segment also encompasses TV/SVOD distribution and home entertainment. Both of these will be cannibalized even more by the company's own Disney+ this year.
Disney Outlook
The company will see lower revenues and operating incomes from its three most significant segments in 2019. While direct-to-consumer will grow revenues, it will not make an operating profit this year, so investors should expect a bad year from Disney.
How bad? That is tough to say without knowing how the virus will play out. I tend to err on the side of being conservative, so here's how I look at things in the House of Mouse.
Parks, Experiences, and Products will see a ~20% year-over-year drop in revenues, and slimmer margins of 22% based on reduced ticket prices at parks and discounted cruises. Revenues will thus be $20.98B, giving Disney an operating income of $4.62B.
Media Networks will be stagnant. We will be coming up on the 2020 General Election in Disney's Q4, which will see an increase in ad spend, which should help balance out cord-cutting losses. Taking the FY19 numbers, Media Networks will have $24.83B in revenues and $7.5B in operating income.
I think studio entertainment will see a hit this year due to cannibalization of the home market by Disney+, and lower box office revenues. The segment will be lucky to pull in $10B of revenues, which would equate to ~$2.4B in operating income.
Finally, Direct-to-consumer. Revenues will soar here thanks to Disney+, ESPN+, and Hulu. Expect the segment to grow to $20B in revenues, conservatively. Unfortunately, thanks to high rollout costs, Disney will take an operating loss of ~$2.5B in this segment.
Adding it all up, we come to $75.8B in revenue and $11.99B in operating income. We must subtract $1B in operating income for eliminations resulting from internal content purchases, leaving us with ~$11B in operating income for 2020, or an 8% loss year-over-year.
Is Disney A Buy At These Levels?
Long-term, it is. However, I would personally wait a couple of months to see how domestic parks play out. If the company starts taking a big hit there, then there will be trouble on the horizon.
If Disney were to drop below $100/share, I would start taking up a larger long-term position. At those levels, Disney would be trading at ~16x my presumed $11B of operating income, which would be more than enough to entice me into oversizing my position.
This article was written by
Analyst’s Disclosure: I am/we are long DIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (52)
Biggest problem is the 38 billion debt and the last 2 years of 500m fcf it’s scary low
2. NBCUniversal (Comcast)
3. WarnerMedia
4. ViacomCBS (acquired by Verizon or Apple)
5. Entertainment one (Hasbro
6. Discovery (buyout All3Media- a television production group with 28 prodcos)
7. enlarged Verizon Media (Verizon)
8. WildBrain or Thunderbird Entertainment (acquired by Activision Blizzard)
9. Canal+group (Vivendi)
10. Sony Entertainment (Sony)
11. 9 Story Media (Take-Two Interactive
12. BertelsmannHonorable Mentions:
1. Sinclair Broadcasting Group
2. Fox Corporation
3. Meredith Corp.
4. Charter
5. Koch Media (Embracer Group)
6. Nexstar Media
7. Gray Television
8. ITV Plc
9. BBC
10. Virgin Media (Liberty Media)
11. Leonine Holdings
12. MGM
12.1 MattelContent is everywhere and it is king couple with Distribution.
