The Walt Disney Company

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

The Walt Disney Company is a global entertainment and media conglomerate, known for its iconic franchises and theme parks. Its operations span across film and television production, theme parks and resorts, consumer products, and streaming services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Disney is a complex business with many layers; it’s essential to analyze each segment separately in order to understand its operations well.

Business Overview

Disney’s revenue is significantly diversified across four major business segments: Entertainment, Sports, Experiences, and Corporate.

  • Entertainment: This segment comprises the traditional movie studios, TV networks, and most importantly, Disney’s streaming services.
    • Linear Networks: This consists of television channels, such as ESPN, Disney Channel, Disney XD, and National Geographic, which generate income through affiliate fees, subscriptions and advertising revenue.
    • Content Sales/Licensing and Other: This revenue is generated through the sales and licensing of television and film content and it includes home entertainment, and content available to be consumed on their streaming services, or by other licensees.
  • Sports: This primarily consists of ESPN, which includes cable television networks and direct-to-consumer streaming services. It focuses heavily on live sports broadcasting and related programming.
  • Experiences: Includes Disney’s world-renowned theme parks and resorts, merchandise sales and various consumer products. This segment is particularly significant for the company’s business due to a high return on the invested capital and higher brand recognition.
  • Corporate and Unallocated Shared Expenses: These are corporate functions and costs, including technology, marketing, finance, legal and other corporate activities that are not directly assigned to the other segments. The business model has changed quite substantially in the last decade, as the company is in the process of turning into a more streaming-oriented company by increasing its focus on online platforms and creating and distributing content using them.

The media and entertainment industry is undergoing a significant transformation, largely driven by the rise of streaming services. Traditional linear television is facing increasing competition from streaming platforms, and consumers are increasingly cutting the cord. While established networks like ESPN can continue to generate cash, their future seems challenging. The movie theater industry is recovering from COVID-19 pandemic but is still far from its previous levels. There’s also uncertainty in the future of theater vs streaming as movie studios are releasing movies through both platforms at the same time. As for theme parks and resorts, while still highly popular, are also prone to changes in consumer preferences and global economic conditions.

Disney operates in many hyper-competitive industries and as such has to be always adapting to the changing market to remain competitive.

Financials

The company’s recent financials, particularly the latest earnings reports from Q4 2022 and Q1 2023, reveal a story of ongoing transformation and some underlying strengths. Here’s a breakdown of the key metrics: Revenues:

  • While the company reported good quarterly revenues of 23.5 billion USD, this has been mainly attributed to their Parks, Experience and Products division, which shows that the core Disney brands still have strong brand power among consumers.
  • Linear Networks revenues have decreased a bit in Q1 2023. Also, the fact that overall segment growth was driven by pricing strategies and not an increase in viewership can be seen as a long term negative.
    • A continued decline in Linear TV may require some action from management and can affect the future revenue of the company.
  • DTC (Direct-To-Consumer) revenue has increased, but not profitably.

Expenses:

  • Costs and expenses have grown substantially YoY, which should raise a red flag.
  • A notable expense increase is seen in direct-to-consumer subscriptions and content production, indicating increased competition and costs that the company has to bear.
  • Higher restructuring costs were also recorded.
  • There was also substantial amortization from Disney+.
  • In particular, the content production expenses will need to be watched closely as more companies are moving to streaming and it’s likely that competition will increase in the content business.

Earnings:

  • Overall, Q4 and Q1 results are far from profitable.
  • There was an impressive EPS increase in Q1 2023 and a positive net income, but it was mainly because the prior period was negatively impacted from the shutdown of parks and resorts.
  • Net income from all segments was down significantly due to high cost and reduced viewership in Linear TV.

Balance Sheet:

  • Disney has a fairly decent balance sheet, but there are areas that need some improvement.
  • Their current assets are almost equal to its liabilities, which doesn’t leave a lot of space for unexpected problems.
  • There is a lot of long-term debt present on the balance sheet, which might affect the company’s ability to execute its investment plans.
  • The net worth has grown slightly over time, which is a good sign.
  • Cash is low when compared to the debt.

Moat Evaluation

Based on the characteristics outlined above, Disney receives a 3 out of 5 for its moat.

  • Strengths:
    • Strong Brand Recognition: Disney’s brand is one of the most recognizable and beloved in the world. Its iconic characters and franchises, such as Mickey Mouse, Star Wars, Pixar, and Marvel, create lasting emotional connections with consumers.
    • Valuable Intellectual Property: The company owns a vast library of content, from classic animated films to blockbuster movies, which continues to generate revenues from its various segments. It also has multiple theme parks and resorts, which provide for additional value to the brand.
    • Broad Distribution Networks: Disney’s reach extends across theatrical releases, linear TV channels, streaming services, and retail channels, which offer a wide exposure of its products.
  • Weaknesses:
    • Erosion of Traditional Media: The rise of streaming services has been eating into the profitability of its linear TV networks, which still makes a significant chunk of the company’s overall revenues.
    • Increased Competition: The competition in streaming is intense, and there are increasing pressures on linear TV and the market share of the major players is decreasing. Other entertainment companies have also started building competitive advantages of their own, increasing the competition overall.
    • High operating costs: While the company is a cash generating machine, high operating and production costs, especially in the streaming division may limit the profits and return on invested capital.

Key Risk Factors

Here are some of the key risks the company faces, which can impair its performance:

  • Technological Disruption: The rapid shift towards streaming and digital consumption poses a considerable risk to Disney’s traditional media business model, such as TV networks and theatrical releases. There is still a lot of uncertainty of how the industry will turn out and if linear TV will completely loose its significance in the future.
  • Changing Consumer Preferences: The entertainment industry is highly susceptible to shifts in consumer preferences. Consumer tastes can be very unpredictable and even the strongest franchises can see a loss of their appeal if it is handled badly. Disney must adapt to these changes quickly and reliably, which is very challenging.
  • Macroeconomic Uncertainty: Economic downturns can hit consumers’ ability and willingness to spend money on discretionary entertainment, such as theme parks, and new movie releases and can have a major impact on the company’s revenues and overall financial performance.
  • Execution Risks: Disney is a large and complex enterprise, the execution of growth plans and cost-cutting initiatives will be key in determining future performance. Failure to do so will hurt the returns of the company.

Understandability Rating

Disney receives a 3 out of 5 for understandability.

  • While the overall business model of producing entertainment content and offering theme-park experiences is well-understood, its operations across multiple media distribution platforms and licensing agreements do make its financials complex.
  • The inter-relatedness of the different segments and the interplay of profits and losses make the financial analysis tricky.
  • Understanding the details of all operations in the different market segments is necessary to understand the business.
  • The effect of new accounting policies can create distortions in the financial statements, which will make the business harder to analyze.

Balance Sheet Health Rating

Disney receives a 3 out of 5 for balance sheet health.

  • While the company has large revenue potential and still has a good brand with high assets, there are some concerns regarding its high liabilities and debt levels, and low levels of cash.
  • Debt is manageable at the current level, but will affect the management’s ability to invest further in expansion or acquisitions.
  • The balance sheet is still strong enough that its financials are stable and that it won’t default at any point.

Recent Concerns

One of the main concerns around the company is the decline of linear TV revenues as people are cutting the cord and streaming services have gained popularity. This is pushing the company to try to find new ways to capitalize on streaming and its massive brand recognition. Disney will have to execute its streaming strategy perfectly to be successful and to maintain its revenue streams. Disney’s new CEO, Robert Iger has taken a lot of important steps to better the content output and also try to create more avenues for monetizing it. Also, recent financial filings reveal that the operating income for streaming is still negative, which shows that the costs are really high to compete in this market. The competition in streaming has drastically increased, and it seems like there will be a need for a long-term fight for the market.

Disney’s long-term success will depend on its ability to successfully navigate the transformation of the media and entertainment industry, with a stronger focus on streaming. Also, they will have to improve the returns on their other segments to keep them from losing their value.