The Walt Disney Company (NYSE:DIS) has proven over time that it is one of the greatest companies in the history of the world. The firm, unlike most other businesses, has created a tremendous ecosystem of value where almost every segment funnels opportunity from it to another segment. Case in point, movies lead to shows, which lead to toys and other memorabilia, which lead to theme parks, and licensing and streaming revenue. The list goes on.
Prior to the era of COVID-19, it was unthought of that the company could be hit hard by any outside event. Even during the 2008/2009 financial crisis, the conglomerate fared well, reporting a decline in sales in just one year over that period of 4.5% and a drop in operating cash flows of 6.7%. And that was during the worst downturn the world has seen since The Great Depression. COVID-19 has revealed that the company is not immune to a different kind of crisis, though. This was made clear in the firm’s second-quarter earnings release for its 2020 fiscal year. Moving forward, investors should expect some pain to come from the enterprise, but what really matters is the long-term picture, which should be fine.
Things could have been worse
To understand just how much Disney has been affected by the COVID-19 crisis so far, we must first understand where a sizable portion of the company’s revenue and profits come from. Last year, around 37% of the firm’s sales and 40% of its segment profits (the latter excluding the money-losing DTC & International segment and both excluding the impact of eliminations) came from its Parks, Experiences & Products segment. By sales, this segment is the company’s bread and butter, while by profits it stands only second to Media Networks.
Due to the spread of COVID-19, Disney’s management team decided to begin closing their parks. Shanghai Disney Resort, which the company has a 43% ownership stake in, ended up temporarily closing on January 25th. Its other parks and resorts soon followed. Today, all of Disney’s resorts are closed down. In a pandemic, this makes a great deal of sense. Given how packed the resorts get, the alternative would have been to see them devolve into hotbeds of viral activity.
Parks, Experiences & Products was not the only part of Disney impacted. The company cited lower advertising for both Media Networks and Direct-to-Consumer & International, as well as an impact on Studio Entertainment. Even so, the bulk of the pain was in Parks, Experiences & Products. During the latest quarter, this segment’s revenue came in at $5.54 billion. This represents a decline of 10.2% compared to the $6.17 billion the firm generated the same quarter a year earlier. Segment profits were even worse, dropping 57.6% from $1.51 billion to $639 million. According to management, the estimated impact on operating income associated with COVID-19 was likely around $1 billion. For the current quarter, the impact on pre-tax income from continuing operations for the firm as a whole might be as much as $1.4 billion.
What was really interesting here is the disparity between the firm’s domestic operations and its international ones. Domestic attendance at its theme parks in the latest quarter was down 11% year over year, while this figure for international parks was down an astronomical 50%. Hotel occupancy rates domestically were at 77% compared to 47% abroad (vs. 93% and 79%, respectively, on a year-over-year basis). Total blended occupancy dropped from 89% in the second quarter last year to 70% this year. Though this may seem strange, it shouldn’t really come as a surprise. It wasn’t until March 12th that Disneyland closed, making it only the fourth time the park was shuttered since opening in 1955. Both Walt Disney World Resort and Disneyland Paris closed on March 16th. With March 28th representing the end of the quarter, the company saw very little impact in this quarter’s release from closures, but even that small impact was painful.
In one bright sign, management did recently announce that it intends to open Shanghai Disney Resort on May 11th. That’s just around the corner and comes four months after the park was closed. Customers will be required to wear masks and the company intends to operate at only 30% capacity. This will likely be the model the company operates under as it opens its other parks, but the bottom line is that investors should expect most of the pain to come in the firm’s next earnings release.
To prepare for the crisis, management has taken a number of wise steps. The first of these was to bulk up its balance sheet. By the end of the latest quarter, the company had cash and cash equivalents worth $14.34 billion. This was nearly three times greater than the $5.42 billion in cash the company had at the end of its previous quarter. The firm also entered into a new $5 billion revolving credit facility in April of this year. This brings total facility capacity for the firm to $17.25 billion, none of which it has tapped into. Another big measure taken by management was the bold move to not pay out its semi-annual dividend this time around. At $0.88 per share, this translates to cash savings of $1.6 billion.
In addition to preparing as best as it probably could for the crisis, management also can boast that there are parts of the business that have not been negatively-affected by the downturn. The most obvious one, and probably the largest, are its streaming operations. In the images above and below, you can see some data related to these operations. What’s really impressive here is the growth the company has demonstrated, particularly in both ESPN+ and especially in Disney+ in recent months. ESPN+ has seen its paid subscriber count soar from 2.2 million this time last year to 7.9 million by the end of the second quarter. Disney+, in about four months, has gone from zero paid subscribers to 33.5 million. In April of this year, the company announced this figure had grown to 50 million, and as of today that number is about 54.5 million. This is awfully close to the 60 million to 90 million figure the company was hoping to have by the end of 2024.
One excellent development is management’s decision to provide pricing data for its streaming operations. Using these figures, by the end of the second quarter this year, the company should have been generating $792.72 million per month from these operations. This works out to $9.52 billion per year. Of course, these services are growing and will continue to do so for the foreseeable future. With 54.5 million paid subscribers today, Disney+ should be generating monthly revenue of $306.84 million. This alone should work out to $3.68 billion per year. Disney is investing heavily into original content and it’s probable that Disney+ will lose money for the near future, but when you consider the long game here, the service will come to represent a massive cash cow for the firm.
Right now, Disney is hurting and some investors in the firm are likely unhappy about what all has transpired. That said, the important thing to keep in mind is that these are short-term impacts and sometime in the not-too-distant future, the company will recover. Maybe it will take a year. Maybe two. But as Disney+ has clearly demonstrated, the Disney brand is alive and well. At the end of the day, that’s all that really matters. With that popularity will eventually come traffic and, in turn, cash flow.
Crude Value Insights offers you an investing service and community focused on oil and natural gas. We focus on cash flow and the companies that generate it, leading to value and growth prospects with real potential.
Subscribers get to use a 50+ stock model account, in-depth cash flow analyses of E&P firms, and live chat discussion of the sector.
Sign up today for your two-week free trial and get a new lease on oil & gas!