Me and Disney

I know DIS from only years ago.  But since I’m a prospective owner through my stock in MVL, I decided to try to get to know the company a little better.  My first look–of potentially many–made me buy a small amount of DIS itself.

Admittedly, although my family and I love Disneyworld and think the makeover of Disneyland is terrific, my expectations were low going in. Watching the stock for years out of the corner of my eye, I was aware of the debacle of Eurodisney (perpetrated by management imported from Marriott, which soon moved on to perform their management act at Northwest Air) and the stagnation culminating in the Eisner years.  But nothing much else registered.

Segment earnings

Anyway, the company is a lot more interesting than I had thought.  Here’s what segment earnings for the past two fiscal years (ends in September) look like in $ millions:

—————2009———-2008

Media                 $4765            $4981

Parks                  $1408           $1897

Studio                 $175              $1086

Consumer         $609               $778

Total                  $6957          $8742

(Note that I’ve excluded the fledgling Interactive segment, which lost $295 million in fiscal 2009 and $258 million the prior year.)

Media breaks out into Cable (mostly ESPN) and Broadcast (the ABC network).  Their figures are:

————— 2009———-2008

Cable              $4260             $4139

Broadcast      $505                $842.

First impressions

1.  The most obvious thing about Disney is that the lion’s share of its earnings come from ESPN, which is also its fastest growing and strongest business.  In fact, another company might be considering splitting in two or changing the corporate name to ESPN, much in the way that Dayton Hudson renamed itself Target some years ago, to make sure investors understood what they were getting when they bought the stock.

The Disney brand is too important to bury it inside a renamed ESPN, though.  IPO 10% of ESPN to highlight the value?

2.  From a business cycle point of view, the company has two arms, Media and Studio, that lead the cycle and two, Parks and Consumer (mostly wholesaling of Disney-branded items), that lag.  As the US economy turns back up, Disney should benefit from higher ad rates in the first two divisions and later on a bounceback in the second two, as consumers begin to open up their wallets again.  This timing may not be so important to investors.  If the first two begin to give evidence of a cyclical upswing, the stock market will likely assume the others will follow and begin to discount the Parks and Consumer upturn before it starts to occur.

3.  Lots of interesting things seem to be happening now at Disney, like:

–the acquisitions of Pixar in 2006 and Marvel Entertainment this year,

–ESPN’s expansion into the UK with Premier League soccer,

–the revamp of Disneyworld and the theme park expansion into Shanghai,

–the family resort in Hawaii and the new cruise ships,

–the ongoing management reshuffling, which could be taken as a refreshing openness to new faces and different perspectives.

You might argue–it’s much too soon for me to be sure–that Bob Iger, the chairman since 2005, is shaking up a previously lumbering giant in a way that will make its long-term growth rate rise.  Add to that a cyclical upturn in earnings and you may have a compelling investment case.

4.  On the other hand, really the only bad thing I’ve noticed about Disney so far is its communications with investors.

Try to find investor relations on the Disney website.  Try to find the phone number of someone to speak with.  You can do it, but it’s not easy.  Then, try to get someone to return your call.  How did Bloomberg, the Wall Street Journal, the Financial Times and the New York Times all get the terms of the Marvel acquisition wrong?  I don’t actually know, but I’m guessing it’s because they were all working from an incomplete press release and had no one at DIS to talk to.

True, the CFO seems to be providing for the needs of brokerage house analysts.  But that’s the model of yesterday, and it’s getting more broken by the day.  One would think that a consumer-oriented company would want to attract individual shareholders who loyally buy their products and use their services.  Disney IR seems to have forgotten about regular people like us in a way that would get them quickly shown the door if they were working for one of the company’s theme parks.

You might say that this is a nitpicking point.  Maybe so.  But my experience is that failure to communicate with actual or prospective shareholders is most often coupled with mediocre, inwardly focused management.

The conference call

The main positive for Disney, I think, is the news they announced that the advertising market is giving signs of recovery, especially for ESPN.  Auto, grooming, insurance and retail are all increasing their ad spending.  Also, ad customers are starting to allocate general advertising money, not just funds targeted specifically for sports, to ESPN.  Digital offerings, ESPN.com, ESPN mobile and ESPN 360 are all improving.  For example, DIS  4 million iPhone users have downloaded ESPN’s Sports Center app.  Of those, 2 million are regular users, and therefore watchers of imbedded ads.  The only obvious area of weakness is NASCAR (why am I not surprised?).

The low point seems to have been passed for the US theme parks, as well, although DIS is still only able to stabilize attendance through discounting.  Current discounts are a bit less than they were earlier in the calendar year, though, which is encouraging.  The parks have less visibility than usual, since visitors are waiting longer before booking.

Fiscal 2009 was a dreadful one for the DIS film business.  But here, too, the worst seems to be behind the company, which appears to have stronger releases on tap for the coming fiscal year.  Yearend writedowns of the underperforming films from fiscal 2009 means that they are unlikely to hurt current year results.

Perhaps the most interesting comment on the call, other than the incipient advertising rebound, was about DVD sales.  In prior downturns, the sales falloff was primarily seen in new releases; older “classics” continued to sell well.  In this downturn, however, sales of everything declined.  How so?  Was it the severity of the recession, or confusion over new formats?  DIS doesn’t think it’s either.  Rather, the company feels this is part of a structural change in the way customers use filmed entertainment.

If so, the consequences for the film business are severe.  DVD sales make up over half the revenue most films enjoy.  On the other hand, it also makes the Marvel Entertainment acquisition look that much better, since MVL has seen strong DVD sales for Ironman and only slightly disappointing results from Hulk.  Also, almost anything would be better than fiscal 2009 film performance for DIS.

All in all, the call had no information to invalidate the investment concept of cyclical earnings rebound plus application of better management to the company’s assets.

Stay tuned.