This is the final article in my series about The Walt Disney Company (DIS). Throughout this process, I've taken a detailed look at each of the company's business segments. However, in order to truly appreciate what makes Disney unique, it's critical to focus on the bigger picture as well.
The advantages that are created when the individual business segments come together as one was summarized by former CEO Bob Iger in early 2019, when he was asked by Barron's about some of the acquisitions that had proved so critical to the company's success. This was his response:
"In the case of Pixar, Marvel, and Lucas, none of them were for sale. We were the only ones. Us identifying them as acquisition targets and my going out and meeting with Steve Jobs and Ike Perlmutter and George Lucas... Looking back, particularly with Marvel and Lucas - Pixar was different - we had an ability to monetize those assets better than anyone else. If someone came along, we would have had a competitive advantage. You can argue that in the Comcast (CMCSA) case with Fox (FOX), they're probably the only other company out there that can monetize. Whether they monetize as well as we do, I don't know. I don't think they're quite where we are."
In my opinion, Disney has built the best mouse trap β no pun intended β for monetizing its intellectual property (IP). As a corollary, Disney is able to make investments to acquire and nurture these brands at a level that its media peers cannot justify. I believe this has led to a sustainable competitive advantage for the company, which is supported by the strong segment results reported over the past decade.
On this point, consider just how important the acquisitions completed under Iger's leadership - most notably Pixar, Marvel and Lucasfilm (Star Wars) β have been for The Walt Disney Company. Those deals were a recognition that best-in-class content creation and IP ownership was the fundamental input required to fuel Disney's business β and for some time, the company had lost its way. As Iger discussed in his book, he came to this realization in 2005 during an opening day parade at Hong Kong Disneyland: "there were barely any Disney characters from the last ten years."
Since then, they have worked tirelessly to address that concern - and considering that Disney accounted for eight of the top ten grossing movies globally over the past three years, it's working.
Today, as Iger noted, Disney's ability to create and monetize its brands through movie theaters, theme parks and consumer products is unrivaled. Comcast has tried, but I agree with Iger β they are still a distant second. Additionally, their ability to effectively monetize the connection that consumers have to their brands has taken another important step forward with direct-to-consumer offerings.
The most notable example is the company's namesake DTC service, Disney+. As I noted earlier in this series, Disney+ has exceeded early analyst subscriber expectations β and Disney's own expectations β by a mile. Looking forward, I believe this success will be sustained, with the service ultimately having well over 100 million paid subs and meaningfully higher average revenue per user (ARPU). I believe consumers will be willing to pay at least $10 per month for unlimited, anytime access to the complete β and growing β library of films and TV shows from Marvel, Lucasfilm, Pixar, Disney and the brands acquired from Fox. As I described earlier in this series, the economics for the DTC business begin to look very compelling when you include those kind of assumptions.
I am also relatively optimistic about the company's position in news and sports. Disney is the most important contributor to the bundle, and they will extract rate increases from distributors that reflects this reality. In addition, their DTC efforts (ESPN+) have the potential to help bridge the gap if the bundle comes under further pressure (which is likely in the short-term given the challenging economic environment, which will cause accelerated subscriber declines in the back half of 2020).
The rise of subscription video on demand (SVOD), most notably Netflix (NFLX), has disrupted the legacy pay-TV business. As the viewership of entertainment programming shifted from the bundle to standalone SVOD services, the price-to-value equation for pay-TV became much less compelling for millions of households, which led to cord cutting. (In April 2020, Nielsen estimated that nearly 25% of video consumption was from streaming services.) Disney, most notably through the high affiliate fees generated at ESPN, was negatively impacted by the decline in pay-TV subs. These developments forced the company to reassess its competitive position and to make fundamental changes to the business. Today, five years after the call where Iger first discussed "some subscriber losses" being experienced at ESPN, Disney is well positioned for what lies ahead. The strength of their brands and IP, as well as their unrivaled ability to monetize these assets, is what will lead to long-term success.
Conclusion
Disney's movie theater and theme parks businesses have been negatively impacted by the pandemic. Investors will need to draw their own conclusions in terms of what impact this will have β if any β on the long-term economics of the business. Regardless of what happens in the short-term, I remain very confident in the value of these assets. A look at the data shows that Disney remains a clear leader in both of these businesses, and I do not expect that to change. Measured by annual attendance, Disney accounts for eight of the top ten theme parks in the world.
As the world returns to normal, people will once again flock to movie theaters and theme parks, with Disney being the primary beneficiary. In addition, I believe Disney will continue to justify and attain the meaningful pricing power that they've demonstrated in the past.
All-in-all, my analysis concludes that Disney, excluding DTC & International, is capable of generating roughly $10 per share in normalized operating income (before corporate expenses and minority interests). Again, that assumes the parks and studio businesses will return to their prior highs as the pandemic winds down, which I believe is a fair assumption given the unique nature of their offerings and the strong demand they've experienced in recent years.
In DTC & International, assuming more than 100 million paid subscribers for Disney+ and rising ARPU's, I believe the segment is likely to generate a few billion dollars in annual operating income within five years. That will take time to materialize, but I think it's a highly likely outcome.
Today, The Walt Disney Company has a market cap of roughly $210 billion. For $210 billion, you can own the media company with the best collection of brands in the world, along with the most effective means for monetizing those assets (and as Iger noted, they are able to offer prices for assets like Marvel and Lucasfilm that others cannot justify as a result). In addition, the company is still in the early innings of taking those assets DTC, which will result in a more meaningful relationship with tens of millions of families globally, as well as the ability to bypass middlemen who previously captured part of the value created by Disney. As I think about the decades ahead, I believe the collection of brands within The Walt Disney Company will continue to grow their share of mind with billions of people around the world. With time, that position will come with economics that justify a valuation that significantly exceeds the current stock price. That said, the short-term headwinds are significant. My hope is that the market becomes overly concerned with these issues, potentially presenting investors with another chance to add to their holdings near the March lows. If given the chance to do so, it's highly likely that I would meaningfully add to my (already large) position in the company.
Disclosure: Long DIS, CMCSA, and FOX
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