The world will always be willing to listen to and pay for a good story. In this new economy of robotics and artificial intelligence, the premium will continue to diverge from left brained towards right brained skill-sets. We will witness an increasing demand for people, products and companies whom are able to articulate a story that customers can embrace. From an investable thesis today, there is no better storyteller than Disney to monetize this economic transition.
In this quarter’s earnings report, I look for this fact to be overshadowed by yet another quarter where analysts will fret the shift away from cable bundle subscriptions referred to as “cord cutting” or the “skinny bundle.” Pundits will tout the dark clouds being cast over Disney’s largest profit center of media networks. I will be on CNBC’s closing bell to discuss Disney’s Q2 earnings on Tuesday, May 9th after the bell to weigh in.
My objective is not to sugarcoat the challenges Disney’s networks division faces today. These are legitimate concerns. Media networks make up over 49% of Disney’s operating profits. ESPN plays a significant role in this calculation. Publications such as Barron’s and Forbes have been vocal about these worries. Even suggesting Disney should just sell ESPN and move on. The argument for ditching ESPN predicts that subscribers will continue to flee traditional cable providers eroding the subscription revenue currently being produced by ESPN.
I believe that a liquidation of ESPN may not be as straightforward as many believe. Only under a complete liquidation of Disney do I find value in spinning off ESPN. More than likely to realize it’s full valuation, there would need to be different strategic buyers of Disney’s assets. There is not one potential acquirer as interconnected as Disney whom I believe could keep the company intact. As such, only under a merger/ sale scenario is this likely to occur.
There are greater synergies with ESPN and other Disney brands than many realize. Live sports will remain one of the last areas where consumers will demand real-time delivery. During March Madness, just trying to avoid hearing the score for two hours of the UCLA Game vs. Kentucky game I was recording, was a nearly impossible task. (Still wishing I missed that one!). People need to watch sports live. Live sports are some of the ultimate stories of our times. Many of us live vicariously through our teams and favorite athletes. We side by side experience the joy of their victory and sorrow of the defeat. This is a personal, real-time journey that we want to experience firsthand.
The challenges ESPN and media in general is experiencing now is merely a shift in the consumption of this content. There are very few of us left that have a television set on the floor larger than an armoire or find ourselves heading out to Blockbuster, renting a VHS tape to pop in the VCR. Many of us today are still viewing the same content we did on those devices though. Today, its more than likely being streamed through Netflix, iTunes, Hulu or some other medium. Whether its ESPN, a classic, or new Disney film, much of it is produced by Disney. Disney content will continue to be part of our lives for years to come. While the medium will continually evolve, Disney has proven their ability to create relevant and engaging content that will stand the test of time. Disney content is part of America and quickly becoming a global culture. Brands like Disney, and its related brands such as Marvel, Lucas, Pixar and ESPN, all permeate our daily lives.
Disney is embracing this shift in the way content is being consumed. Leadership is already making great strides through various alliances with Over the Top (OTT) solutions such as YouTube live, DirecTV now and with recent acquisitions making such as Bamtech to maintain audiences. This movement is being led by Bob Iger, one of the most visionary CEOs of our time, who has recently extended his contract with Disney until Mid-2019 to make sure this transition is smooth for shareholders.
Let’s not forget that Disney is more than just the networks division. The companies fastest growing division, Studio and Entertainment continues to create billion dollar blockbusters. Not too long ago, critics said there would never be another hit like Frozen. They were wrong. Most recently, Beauty and the Beast, which only cost $160million to produce, has surpassed the $1 billion mark. Out in theaters this weekend, Guardians of the Galaxy 2 brought in over $145 million, easily topping the first Guardians film which tallied a $96 million opening weekend and even topped Disney’s own expectations of $140 million for Guardians 2. On the horizon, Pixar’s new film COCO, Cars 3, a new Johnny Depp Pirates film and the much-anticipated Star Wars episode VIII are still to come in 2017.
Disney’s second largest division, Parks and Resorts, exemplifies the unique power of the Disney monetization theme across channels. As the Guardians’ film hits the streets, Disneyland is preparing to launch a new Guardians of the Galaxy ride at Disneyland in Anaheim and is currently stocking the parks with Guardians’ merchandise to capitalize on the enthusiasm. There is no other media company with this ability to monetize content across so many channels.
Meanwhile, the parks and resorts division’s cruise ships continue to charge a premium and remain near capacity. In fact, two new Disney ships are being built to meet demand adding to the future pipeline for Disney revenue. This will increase the fleet from four to six ships – significantly increasing capacity for travelers and revenues for Disney.
When Disney reports Tuesday I would expect the success of Beauty and the Beast and strength from Parks and Resorts to have a positive impact on the numbers. The short-term headlines of ESPN worries may sound a bit shaky for Disney. I believe, for those with a longer perspective if the stock is hit because of those headlines, it may provide an opportunity. Disney is a company that is aggressively buying back its own stock, trading at a discount to the market and has irreplaceable assets adored by fans across the globe.
The one constant in this new economy is change. Disney’s ability to embrace and adopt to that change leads me to believe they will continue to be represented in the winner’s circle.
At the time of this writing, May 7th, 2017, myself, and clients of my firm Surevest own Disney shares. This is not an offer to buy or sell stock. No representations regarding the accuracy of this article are being made. Those looking to buy or sell Disney stock should consult their financial professional to determine whether it is right for their individual needs.