Disney: the entertainment heavyweight

 

 

The Walt Disney Company is the largest global entertainment company. The business is highly diversified, which, combined with effective corporate governance and timely reorganization, has allowed Disney to survive the pandemic with relatively little loss. In pre-crisis 2019, the segment related to amusement parks, hotels, cruise lines, and consumer goods accounted for 38% of sales. At the same time, the share of film distribution and distribution of content on television accounted for about 52% of total revenue. In 2020, the management set a course for an active expansion of activities in the video streaming market, which was positively received by investors: the shares rose by 25% in a year, despite the significant negative effect of the pandemic, which, in particular, led to a decrease in revenue of the segment associated with amusement parks, by 37% YoY. We believe Disney deserves increased investor attention this year. Our optimistic outlook for the company is driven by two key factors.

First, we see significant potential for a recovery in revenue and operating profit in the amusement parks segment. The financial results of this direction for the last quarter ended in March turned out to be higher than the expectations of investors. At a dedicated conference held by JP Morgan in late May, Disney CEO Robert Chapek stressed that demand for visiting Walt Disney World, Florida, had already recovered to pre-2019 levels.

However, the main limiting factor remains quarantine restrictions, which so far do not allow the park to be fully loaded. Nevertheless, we can already predict that further progress in vaccination of the population, a decrease in the incidence of COVID-19, and the opening of borders to tourists will lead to the implementation of massive deferred demand in the United States and in other countries.

During the pandemic, the company has taken a number of measures that will contribute to a more comfortable stay for vacationers in amusement parks, such as virtual queues for attractions and ordering food through a mobile application. Second, we predict that streaming service subscribers will accelerate in the second half of the year, while film distribution revenues will increase. Growth in these segments will be driven by planned premieres of films with high audience expectations. Among them - "Black Widow" starring Scarlett Johansson (July 7) and "The main character" (August 11) with Ryan Reynolds.

Disney +, ESPN +, and Hulu currently have 159 million subscribers worldwide, and management's goal of reaching 230–260 million by 2024 looks quite achievable, including by actively expanding its sporting rights portfolio. High audience loyalty is best demonstrated by the Churn Rate, which hasn't changed significantly despite the recent $ 1 / month increase in the cost of Disney + subscriptions.

Among the risks for Disney stock, we note the expected merger of AT&T (Warner Media) media assets with Discovery, which should result in a new company called Warner Bros. Discovery. As a result, competition in the video streaming market may intensify, but we believe that this factor is not critical for Disney's streaming business, as target audiences of competitors differ and Disney has the strongest position in the industry in children's content.

In addition, Disney's debt burden will be lower than that of the combined company. A long-term driver of Disney revenue growth that is not fully accounted for by investors is the potential use of amusement park visitor data to accelerate the growth of subscribers to Disney streaming services. Vivian Blumenthal raised this topic at the JP Morgan conference, so it can be assumed that the first actions aimed at realizing this synergy will be taken as early as 2021. The target price for Disney shares over a 12-month horizon is $ 210.