“Falling Princess” Disney ushers in a “bottom sweep” moment

Affected by the epidemic, Tokyo Disneyland closed from March 11 to early April. On the following 12th, Disney Paris decided to stop park cruises, Disneyland closed, Disney postponed a series of other films such as “Mulan” …

A series of bad news followed, and Disney’s stock price fell. As of March 15, the author’s draft, Disney’s stock price has fallen by 30.82% in 2020. But what I want to ask is, after 10 years, will children still watch Donald Duck, Mickey Mouse? Will young people get addicted to Marvel heroes? Will people still choose Disneyland as a holiday destination? Many people’s answer should be: YES! If your answer to the above three questions is also “YES”, then the short-term stock price decline due to the new crown pneumonia epidemic may be the best time to “bottom” Disney.

Outbreak affects entertainment activities, sharply reduces Disney’s main business
If you want to buy Disney, you must first understand Disney. Many people’s impressions of Disney may linger on some cartoon characters, but today’s Disney is long gone.

Disney’s media network mainly includes two parts of business: The first part is the cable television business. Acquired most of Fox’s business, and successfully completed the sale of part of the acquired business last year. At present, the cable TV business can bring about $ 16.5 billion in annual turnover and about $ 5.4 billion in operating profit to Disney. Its operating profit margin exceeds 30%. In the cable TV business, there are 65 million sports fans in the United States who must subscribe, and ESPN (Entertainment and Sports TV Network), which is the most expensive of all cable channels, and families and children like it. Up to 227 million people in the United States subscribe. Disney Channel.

The second part is radio and television services. The business was acquired through the acquisition of the capital city ABC in the 1990s and provided a turnover of US $ 8.3 billion and an operating margin of US $ 1.35 billion in 2019. It is worth mentioning that Buffett was once one of the major shareholders of Capital City ABC, and the chairman of Capital City ABC, Tom Murphy, is one of the recognized compounders in the capital market. He has also been One of the directors of Berkshire Hathaway. Nationally, more than 240 local radio and television stations are affiliated with ABC. They obtain the right to broadcast American radio and television programs by paying Affiliate Fees. In addition to these local television stations affiliated with American Radio and Television, Disney directly owns eight television stations, occupying six of the top ten markets in the United States.

The way to make money from cable and broadcast television is to introduce advertisers ’advertisements and collect fees from advertisers on the one hand (the contribution of this part in 2019 is $ 6.97 billion), and on the other hand, they are required to be affiliated For their cable operators and local radio and television stations, they pay affiliation fees based on market size and headcount (contribution to this segment in 2019 is $ 13.4 billion). In addition, Disney will charge some playback rights through home discs or authorized subscription video-on-demand operators (such as Netflix / Netflix) (the contribution of this part in 2019 is $ 4.4 billion). (see picture 1)

Disney’s largest revenue segment is parks, experiences, and products. That’s why the pullback of Disney’s stock price is so drastic: The sudden decline in entertainment activity caused by the new crown virus has almost (temporarily) devastated the sector.

It is worth mentioning that Disney’s ownership of the park is often not high. For example, Disney owns only 47% of Hong Kong Disney Resort and only 43% of Shanghai Disney Resort (the remaining 57% is owned by Shanghai Shendi Group). Japan Disney is not owned by Disney, and Disney only charges part of the royalties. Disney also operates four vacation cruise lines, primarily in North America and Europe. If the park is closed, it means that tickets, beverages and food, leisure resorts and company licensing rights will all disappear. This will affect Disney’s 44.9% operating profit. (See Figure 2)

Disney’s streaming media transformation effect exceeds expectations
Disney’s theater entertainment component consists of three parts: film production and screening, stage production and performance, home entertainment (DVD, etc.), and television and subscription video on demand. Over the past year, Disney used this sector to generate $ 11.1 billion in revenue and $ 2.69 billion in operating profits. It is worth mentioning that, as of January 6, 2020, Frozen II has just become the highest-grossing animated film at the box office in the world (as of that day, revenue was $ 1.32 billion). Frozen II is also Disney’s sixth billion box office movie in 2019, continuing the continued momentum of Disney blockbusters.

The last section is Disney’s international business and streaming media section. Although this sector is currently losing money (revenue of 9.35 billion, loss of 1.81 billion), it is the most sought after and full of expectations in the capital market. Due to the popularity of streaming media, a large number of North American audiences, “Cord Cutting,” bid farewell to cable TV services that had to pay for a series of bundled TV channels, and put them into the arms of Netflix or HBO. Because of this, the price of North American cable TV has been under unprecedented pressure, and the highest price tag and pressure is Disney’s most profitable sports channel ESPN. Because ESPN has signed long-term contracts with major sports organizations (such as the National Major League Baseball, National Basketball Association, etc.), the annual cost will continue to rise. Rising costs and price pressure will cause profit squeeze. If we look at Disney’s stock price over the past few years, we can see that the stock’s stock price has stalled from 2015 to 2019. The reason why valuations have been compressed is inseparable from the “cut cable” movement.

Whether Disney can survive in the new competitive format is highly dependent on whether it can complete the streaming transformation. Realizing competition from streaming companies such as Netflix and HBO, Disney quickly responded under the leadership of Bob Iger. Disney doesn’t lack quality content, it just lacks a way to reach consumers directly. Through the acquisition of Fox Assets, Disney acquired a controlling stake in Hulu, a streaming platform with 30 million audiences, and acquired operating rights through a gambling agreement with another Hulu major shareholder. At the same time, Disney has moved the cable television channels ESPN and Disney to their own streaming platforms, which is exactly the moment the market is waiting for! On November 12, 2019, Disney was finally ready to launch the Disney + streaming platform. Analysts at the time generally estimated that Disney could get about 10 million subscribers by the end of the year. However, on the first day of the Disney streaming platform, Disney gained more than 10 million subscribers. This record far exceeded the market’s imagination. The stock price closed up 1.7% and reached a record high by the end of November.

Is Disney worth a dip?
Howard Max of Oaktree Capital once said that in investing, first consider risks and then think about returns. For investing in Disney, I think there are two risks. Short-term risks have been mentioned above. Disneys around the world have closed (interestingly, Shanghai Disneyland has recently opened), and the movie’s release has been delayed, affecting Disney’s $ 37.3 billion in turnover. Overlay streaming is not expected to be profitable until 2024, which will undoubtedly make Disney’s performance this year even worse, which is very ugly. In addition to the closure of many Disneyland parks cited by Wen Shou, the cinema business line has also fallen into depression. The CEO of a theater chain, who asked not to be named, said, “In the short term, this may be the biggest theater financial disaster in history.” As can be seen in Figure 3, last week (March 2-6) Box office fell 58% year-on-year, and quarantine measures in North America have just begun.

Although the negative impact of short-term revenue will make Disney’s 2020 net profit income very ugly, the impact will be limited in the long run. Disney bears $ 60 billion in debt, but annual interest expenses are only $ 1.2 billion. Last year, Disney’s operating profit was as high as 15.1 billion U.S. dollars, and its coverage multiple reached 12.6 times. No matter how the performance is affected, the ability to pay interest in the short term can be guaranteed. Therefore, the short-term blow may be A great opportunity to get involved.

As far as the author is concerned, more attention is paid to the success of Disney’s streaming media transformation. From the current data, Disney + ‘s ability to attract members far exceeds investors’ expectations. At the end of 2019, Netflix, the largest streaming media company currently, has 60 million domestic paid users and 97 million international paid users, and Disney opened its streaming platform on the first day to attract 10 million domestic paid users. Extrapolating in accordance with the current trend, in another 4 years, that is, by 2024, Disney will be able to achieve breakeven in streaming media. By then, Disney will have 90 million paying customers, and then Netflix will have 300 million paying customers. The gap in the number of paying customers will be reduced from 15 times to 3 times.

Netflix can’t compete with the huge content warehouse that Disney has run with painstaking operation for the past century. In addition, Disney owns six film production companies including Pixar and Fox, which continuously produce high-quality content, and form a positive feedback chain through Broadway opera, amusement park entertainment facilities, and product licensing to enhance customers’ corporate culture and content. This kind of level, this is also Netflix and other pure streaming platforms can not compete. Finally, Disney’s use of quality content accumulated over a century may be tempting to some potential tech giants because of its share price decline. After all, the cost of scripted content production this year is due to Amazon, Apple, AT & T’s HBO, and Nai The fierce competition of streaming media such as Fei is expensive, and if you can get cheap and high-quality content that has been recognized by generations of audiences through mergers and acquisitions, why not?