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From the desk of Willie Keng
Tue, 1 Sep 2020
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Don’t you just LOVE theme parks.
Soooo… I brought my family last Oct to Disneyland, California. My wife and son LOVED it to the moon.
It’s the perfect place for any occasion. I loved it too.
“Let’s come here again…!” as my wife gleefully said to me, while returning back to our hotel.
Man, I thought to myself — this is one darn good business. It taps straight into our inner child, no matter how old you are.
Fast forward, that very same theme park we went to is now deserted.
Closed.
Covid-19 is a wrecking ball that smashed its theme park businesses.
The impact was disastrous. Disney (Ticker: DIS) saw its most recent 3Q revenues down 42%, recording its first ever net loss after a long while.
Closed theme parks, retail stores, suspended guided tours, poor merchandise sales.
Here’s more. Covid-19 even delayed or cancelled many of its theatrical releases at Studio Entertainment.
And the most devastating thing… Dividend has been cut. Yikes…
But a deeper look tells us this magical story is far from over.
"...It's also important to note that throughout our company's nearly century-long history, Disney has been through a lot -- including wars, economic downturns and natural disasters. And what we've demonstrated repeatedly over the years is we are incredibly resilient."
I respect Bob Iger in his tenacity to creatively grow DIS into an entertainment giant today.
And DIS is not pulling the brakes because of Covid-19.
Here’s 3 reasons why I think DIS is going to blast out of the Pandemic more alive than dead.
#1: One-of-a-kind Crown Jewel
Entertainment is still at the heart of not only children, but adults too.
And DIS’s valuable content just cannot be replicated.
You can say DIS has a one-of-a-kind Crown Jewel.
…and that Crown Jewel is its deep vault of our favorite cartoon characters and superhero brands.
Who doesn’t love them?
Their theme parks like Disneyland and Disney World have also attracted millions of tourists from all over the world like a magnet.
Recent success with Pixar and Marvel has created huge opportunities with adults who have grown with their easily recognizable childhood TV characters.
Plus, DIS’s acquisition with Lucasfilm adds another avenue to engage with children and adults.
A loyal following = strong brand equity. Customers are willing to pull out their dollars for your stuff. If it’s good.
#2: Theme parks are still a cash cow
I know parks will be closed through 2020.
But hear me out.
There’s going to be a massive pent-up demand for tourists to visit its parks. Why?
There’s no way you can scream your lungs through the Big Thunder Mountain Railroad or bedazzled by their 4-D rides at your home.
Theme parks are huge business to DIS.
And over the past years, it’s been a huge contribution to its revenues, generating immense cash flow.
See Parks, Experiences and Products segment below…
Source: Company Filings
#3: Disney+ is another plus to DIS’s recurring cash flow
Disney+ has surpassed all expectations.
DIS recently reported its streaming service passed 50 million subscribers. With its affordable subscription fees of $70 a year, this could potentially add another $3.5 billion of annual cash flow.
And it could double by 2025, considering the already huge growth in subscriptions.
When DIS launched Disney+ last Nov, management expected its service to attract 60 to 90 million subscribers by 2024.
Well, it almost reached its goal in less than 6 months.
Disney+ is an extension of its already strong distribution channels, where subscribers can watch some of the world’s most popular movie franchises, including Pixar, LucasFilm and Marvel.
While its theme parks have closed, many households are staying home to watch TV, and what better way to enjoy your favorite shows and movies at the comfort of your own home at an affordable price.
One of the guiding premises in media is this — value of content continues to increase even as the distribution markets evolve.
Top media providers like Netflix and Amazon Prime have already established their foothold in the on-demand streaming market.
But content creation is NOT a zero-sum game, as high-quality content will always make its way to consumers easily.
And DIS has its library of high-quality content.
My thoughts on DIS — “High-Quality Content is King”
This is one business where DIS has successfully monetized its brands and trademarks again and again.
Its return on invested capital (ROIC) — grew from a mere 8.7% in 2010 to 14.2%, 19.2% and 11.5% in 2017, 2018, 2019 respectively — That’s pretty good return on your money.
#3: Disney+ is another plus to DIS’s recurring cash flow
Disney+ has surpassed all expectations.
DIS recently reported its streaming service passed 50 million subscribers. With its affordable subscription fees of $70 a year, this could potentially add another $3.5 billion of annual cash flow.
And it could double by 2025, considering the already huge growth in subscriptions.
When DIS launched Disney+ last Nov, management expected its service to attract 60 to 90 million subscribers by 2024.
Well, it almost reached its goal in less than 6 months.
Disney+ is an extension of its already strong distribution channels, where subscribers can watch some of the world’s most popular movie franchises, including Pixar, LucasFilm and Marvel.
While its theme parks have closed, many households are staying home to watch TV, and what better way to enjoy your favorite shows and movies at the comfort of your own home at an affordable price.
One of the guiding premises in media is this — value of content continues to increase even as the distribution markets evolve.
Top media providers like Netflix and Amazon Prime have already established their foothold in the on-demand streaming market.
But content creation is NOT a zero-sum game, as high-quality content will always make its way to consumers easily.
And DIS has its library of high-quality content.
My thoughts on DIS — “High-Quality Content is King”
This is one business where DIS has successfully monetized its brands and trademarks again and again.
Its return on invested capital (ROIC) — grew from a mere 8.7% in 2010 to 14.2%, 19.2% and 11.5% in 2017, 2018, 2019 respectively — That’s pretty good return on your money.
And DIS is not stopping there.
It plans to be a media kingpin by acquiring distribution networks to deliver its high-quality content to consumers.
Its 2019 21st Fox Century acquisition is one key step to its goal.
Their recent dividend cut is not surprising.
Businesses have been hit hard considering the closure of their theme parks. But once their business resumes, I believe their cash flow engines will run back at full capacity.
There’s going to be some short-term pain now, but I don’t think the 800-pound mouse will disappear anytime soon.
And I think both my sons are going to enjoy DIS’s cartoon characters for a long time to come.
