A recent Bloomberg article titled “TV Loses Grip on Eyes and Ads That Want Them” highlighted some worrying signs for most media-related long-term investors. According to the article, money spent globally on commercial spots in YouTube videos, Facebook (FB, Financial) feeds and news websites will overtake the ad dollars spent on TV commercials for the first time in 2017.
(TV Loses Its Crown, Bloomberg)
Further, younger consumers (ages 18 to 24) now spend about half the time, 16 hours and 18 minutes a week, on TV compared to its elders (35 and older). Not surprisingly, the young spend most of their time on smartphones.
(Ads Follow Eyeballs, Bloomberg)
In the meantime, however, the news agency found that TV advertising sales had not been affected by the rise of Internet-related advertising gains. Instead, radio and newspaper advertising were the most affected by technological advancements. Nonetheless, the article pointed out that TV’s unscathed status in delivering advertising revenue will sooner or later be affected by the rise of Internet advertising popularity.
Relating these upcoming threats to the ad-related business of any media conglomerates out there, Disney (DIS, Financial), then, would either directly or indirectly be somewhat affected by this emerging trend.
(The Walt Disney Company, Disney Annual Report)
Disney
The Walt Disney Company was founded on Oct. 16, 1923, 92 years ago, by Walt Disney and Roy O. Disney as the Disney Brothers Cartoon Studio. The Walt Disney Company, together with its subsidiaries, is a diversified worldwide entertainment company with operations in five business segments: Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products and Interactive.
(Walt Before Mickey, Netflix)
In some way, advertisement (ad) sales always contribute to Disney’s media and cable networks. Ad sales are collected from advertisers for time in programs for commercial announcements.
Disney’s network also profits from several other revenue generators in addition to ad sales. These sales generators are affiliate fees and program sales. Affiliate fees are collected from television stations that in return allow the TV stations to provide Disney programs to their customers/subscribers. Program sales, on the other hand, are sales gathered from the sale and distribution of Disney television programming. Disney’s cable networks include ESPN, the Disney Channels and ABC Family. Further, Disney operates the Hungama and UTV/Bindass networks in India.
(ESPN, Marketing Cloud)
As of October 2015, Disney’s majority-owned (80%) ESPN network had 92 million subscribers with Hearst Corporation owning a 20% minority share. Wholly owned Disney Channels, which carries the branded channels Disney Channel, Disney Junior, Disney XD and Disney Cinemagic among others, had 95 million subscribers domestically and 195 million subscribers internationally. A&E Television Networks, on the other hand, had some 94 million subscribers. A&E is a joint venture owned 50% by Disney and 50% by the Hearst Corporation. Disney’s ESPN, Disney Channel and A&E had 100 million subscribers both back in 2010.
In addition to the media networks above, Disney also owns eight television stations, six of which are located in the top 10 markets in the U.S. in terms of TV households. According to the company, the TV stations derive the majority of their revenues from ad sales.
(Disney’s TV stations and their corresponding rankings, Annual Filing)
Disney also owns one-third of the Hulu service. The company is in partnerships with Fox Entertainment Group and NBCUniversal. According to the company, Hulu offers a free service with commercials, a subscription-based service with limited commercials and a subscription-based service with no commercials. In addition, Disney also owns 50% of Fusion in partnership with Univision.
In fiscal year 2015, media networks business segment recorded a 10% growth to $23.3 billion and had contributed 44% to Disney’s total sales. The business segment represented the second-highest earning among Disney’s businesses with 33% operating margin in the fiscal year.
In the first quarter, Disney demonstrated sales growth of 4% to $12.97 billion compared to the same quarter last year. The company also showed profit growth of 2% to $2.1 billion. Specifically, the media network business grew -0.29%. Disney is slated to report its second-quarter earnings on Aug. 8.
Parks and resorts
Disney also owns and operates several Parks and Resorts around the world. In addition, the company also owns 81% of Disney Paris, 47% of Hong Kong Disneyland Resort and 43% in Shanghai Disney Resort. The company also licenses its intellectual property to a third party for the operations of the Tokyo Disney Resort.
Disney’s Parks and Resorts business segment grew 7% to $16.2 billion and contributed 31% to its total sales in fiscal year 2015. Meanwhile, the company reported a 4% growth to $3.93 billion on the business segment in the first quarter when compared to the same period in 2015.
Studio entertainment
According to Disney, this business segment produces and acquires live-action and animated motion pictures, direct-to-video content, musical recordings and live stage plays. Further, the company distributes films primarily under the Walt Disney Pictures, Pixar, Marvel, Lucasfilm and Touchstone banners.
(Captain America: Civil War, Science Fiction)
Disney’s Studio Entertainment grew by 1.2% to $7.34 billion and contributed 14% to its total sales last year. Further, the segment grew 22% to $2.06 billion in the first quarter compared to the same period last year.
Interactive
Disney’s Interactive business segment, on the other hand, creates and delivers branded entertainment and lifestyle content across interactive media platforms. The segment also once carried Disney Infinity. According to the company, Disney Infinity features a game world based on company properties that combines physical toys and story-driven gameplay.
(Disney Infinity, Wall Street Journal)
In May, Disney’s CEO Bob Iger decided to get rid of Disney Infinity and book a $147 million charge instead. The reasons provided for discontinuing one of Interactive’s recently initiated segments were increased competition from real-world toys and video games and stagnant consumer interest. Disney Infinity was initiated in 2013. The Interactive segment grew -10% to $1.17 billion last year.
In Disney’s 2015 annual report, the company stated that the Interactive segment will be combined with the Consumer Products segment in financial reporting. Regardless, Consumer Products and Interactive segment grew -2% to $1.19 billion in the first quarter to $1.19 billion. Both segments had $5.67 billion in sales in 2015.
Cash, debt and book value
As of April 2, Disney had total cash of $5.02 billion and total debt of $21.1 billion. The company also had a debt-to-equity ratio of 0.48. Disney also had 39% or $34.9 billion of its total assets of $90.3 billion as goodwill and intangibles. The company had a book value of $44.1 billion.
Cash flow
As of 2015, Disney had $10.9 billion in cash flow from operations. The company spent $4.27 billion in capital expenditures giving it $6.64 billion in free cash flow. Nonetheless, Disney paid out $9.16 billion in dividends and share repurchases, which represented 138% of its free cash flow. Further, the company also reduced its outstanding debt by $2.2 billion.
In order to fulfill these billions of cash flow, Disney had issued $4.9 billion in borrowings in addition to the $1 billion cash flow it received from noncontrolling interest contributions.
Valuations
According to GuruFocus data, Disney has a trailing 12-month price-to-earnings ratio of 18 times, price-to-book value ratio of 3.59 times. The company also sponsors a trailing 12-month dividend yield of 1.48%. The Standard & Poor's 500, on the other hand, has a price-to-earnings ratio of 25 times and a price-to-book value of 2.88 times while sponsoring a dividend yield of 2.05%.
Conclusion
The threat that the Internet will take away some of the media networks' ad business is alarming. But mobile use and TV viewing have been coexisting for decades already. Innovation through mobile apps surely brings more competition to traditional TV ad sales. Regardless, the future is uncertain until sales growth in the media network business shows some decline.
So far, Disney has yet to show this affectation. In total, ad sales contributed 38% to Disney’s media network business segment. Further, ad sales grew 4% year-on-year in fiscal 2015. Ad sales are just a part of Disney’s overall business operations. Several other catalysts should be given weight in the company’s future, such as the newly opened Shanghai Disney Resort and the divestment of the struggling Interactive business. These events would certainly bear fruit in years to come as Disney will be able to focus more its energy especially in two of its more profitable businesses, media networks and parks and resorts. Currently, Disney appears to be fairly valued when compared to the broader market.
Disclosure: I am long Disney. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from GuruFocus). I have no business relationship with any company whose stock is mentioned in this article.
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