Barron’s Highlights Disney

Disney (DIS) won’t officially join our Buy List until the start of trading on Wednesday, but Barron’s gave it a nice overview this weekend. Here’s a sample:

Walt Disney (ticker: DIS) has in a sense become more Disney-like in how it earns its profits. After 20 years of being dominated by television, especially cable, the company is returning to its roots in films and theme parks. Seven years ago, for each $1 in operating profit that Disney made from its parks and studios, it generated $3 in TV. During the fiscal year ended September, parks and studios retook the lead.

That’s one part of a transformation that could help pull Disney’s stock out of a three-year slump. The other crucial element is Disney+, or “the service,” as company executives privately call it. It’s a streaming platform coming in late 2019 that will bring shows and movies directly to viewers, and it’s a bigger priority for the company than even its Star Wars lands as it takes on the Death Star of TV, Netflix (NFLX).

Disney’s streaming arsenal will be bolstered by its $71 billion acquisition of film and TV assets from 21st Century Fox (FOXA), expected to close in 2019. (Fox is the sister company of Barron’s parent, News Corp.) The deal gives Disney the 20th Century Fox film and TV studios. That includes Avatar, one of the top-grossing films in history, which has at least two sequels in the works and comes with a park tie-in: Pandora, a sprawling land based on the film, opened in 2017 at Disney World’s Animal Kingdom under a licensing agreement.

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For decades, Disney was largely a moviemaker with theme parks, although television has long been part of the mix; The Mickey Mouse Club, which began on ABC in 1955, helped finance Disneyland, and the Disney Channel has been a cable mainstay since the 1980s. But in 1995, Disney surprised investors with a $19 billion acquisition of Capital Cities/ABC, gaining a prosperous TV network and a thriving ESPN. As cable spread service across the nation, and TV producers learned how to extract higher fees from cable operators for their content, the small screen became Disney’s big earner.

Iger planted the roots of Disney’s growth spurt in its traditional businesses when he rolled up major story-telling outfits that weren’t for sale. He did that by visiting their bosses one-on-one: Steve Jobs, culminating in the $7.4 billion purchase of Pixar in 2006; Isaac Perlmutter, for a $4 billion acquisition of Marvel Entertainment in 2009; and George Lucas, in a $4 billion deal for Lucasfilm in 2012. What has followed has been a film boom for the ages.

This year, Disney will again become the only studio in history to reap $7 billion in worldwide box office receipts: $4 billion internationally and $3 billion in the U.S. It also did so in 2016. And Disney makes eight to 10 films a year; some big studios make two dozen.

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By taking its movie magic to the parks, Disney has grown attendance and ticket prices while adding park events with separate ticket charges. In 2016, it introduced peak pricing for admission. A one-day visit to the Magic Kingdom during Christmas week cost as much as $129. That’s up from $55 before Iger took over in 2005—a faster rise than the Dow Jones Industrial Average of stocks over the same time period.

Yet the parks are packed, according to the vast constellation of bloggers and small-business owners who give advice on when and how to visit. “Is There an Off-Season at Disney World?” asks a post by DisneyTouristBlog.com owner Tom Bricker.
Operating profit from Disney’s parks has almost tripled over the past seven years, to nearly $4.5 billion during the year ended in September. Merchandise earnings have soared, too.

Wall Street, however, has valued the popularity of Netflix—and its challenge to cable TV—over Disney’s success in the parks. Netflix expects to end the year with 138 million subscribers, including just under 80 million international ones. It has amassed them by spending feverishly on content. Management plans to burn $3 billion to $4 billion in cash this year and next.

The stock closed Friday at $107.30 per share. That’s down from a 52-week high of $120.20. It looks like Disney will earn about $7.10 per share in 2018. Wall Street currently expects 2019 earnings of $7.45 per share.

Posted by on December 30th, 2018 at 6:37 pm


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