Disney: Surviving Through A Pandemic

Welcome to the first Dividend Seeker posting for me here at Substack! I did some research and spoke to many others in the field before making this switch. The email route was running into issues on the number of emails I could send out among other things.

In addition, having everything posted here to Substack would allow users to easily look back on prior postings. So thank you for joining and let’s get started!

Today I am going to discuss the recent earnings from The Walt Disney Company (DIS) and how the prospects of their stock look currently.

The Walt Disney Company has long been a fan favorite of many investors, including my two young children. They do not really understand stocks yet, but DIS was the first stock I bought for them thinking that as they get older and can begin grasping the idea of investing, why not start them off with something they can relate to and enjoy.

Enjoying Disney is not something we have had the opportunity to do much of in recent months. Being Annual Passholders, my 4yo daughter has been accustomed to visiting Disneyland at least once a month until COVID-19 came and shut everything down.

Let’s jump into the company.

Disney reports financial results using four primary segments:

• Media Networks

• Parks & Resorts

• Studio Entertainment

• Direct to Consumer

Media Networks relates to the company’s cable business, which includes the likes of ESPN and ABC.

Parks & Resorts relates to all the theme parks and surround Disney resorts.

Studio Entertainment relates to all the Disney films. This includes films from ALL Disney related studios, including: Marvel, Star Wars, Pixar, etc.

Direct To Consumer is largely related to Disney+ and Hulu now being the main focus.

This week Disney reported Q3 earnings, here is how they looked.

Media Networks has largely been the company’s primary segment for a number of years, but recently got passed by Parks & Resorts as that segment grew and cord cutting gained steam. Media Networks was one of only two profitable segments during the quarter, but has been slowed by the impact of sports largely being shut down for the quarter and slowly working there way back.

As we know, the parks were closed for a large portion of the quarter and Disneyland remains closed. That segment has been decimated due to COVID.

Another segment decimated by the pandemic has been Studio Entertainment. The company launched Onward a few months back onto Disney+ and now are doing a similar direct release for upcoming film Mulan live action.

The major bright spot, which has continued from the previous quarter has been the success of Disney+. As of the company’s earnings announcement, the platform had surpassed 60.5 million paid subscribers globally. The great part is that the platform continues to rollout in international markets, so the strong growth should continue.

This puts Disney+ years ahead of where Netflix was. I think a big portion of the subscriber base is families in North America, and the next goal will be to start attracting more adult subscriptions. This is where Netflix separates themselves, currently.

Disney is trying to do this as they have released hits such as the Mandalorian, Hamilton, and Beyonce’s Black is King.

Next, let’s take a look at valuation and see if this is a stock worth owning.

Disney is difficult to value based on trailing twelve month data due to how they have been impacted since March. Instead, one would have to look forward at how the results would look given a vaccine is produced.

Cash flows from operations are up 39% over nine months compared to prior year. The company continues to invest heavily in rolling out Disney+, which loses money right now, similar to Netflix in their early years as well.

Trading at 26x forward earnings, which assumes thing return to normal, using a forward earnings estimate of $4.98, I believe the stock is fairly valued. The company still has a long uphill climb considering Disney+ was the bright spot, but cannot really help the money making segments of Studio and Parks & Resorts recover from this pandemic.

Management is doing the best they can to preserve cash with layoffs, suspending the first half dividend, and also adding debt.

Debt levels are also beginning to look concerning at $54.2B, a 27% increase from prior quarter.

I do not feel shares are cheap by any means, especially after the recent boost considering all the work they have cutout for them in some of their major segments.

Leave a comment, I would enjoy hearing your take on Disney.