Disney (DIS) and Florida


DIS was entering a graceful old age under Michael Eisner when Bob Iger replaced him as CEO in 2005. At that time, something like 3/4 of DIS earnings came from ESPN, whose attempt to expand its dominant US sports coverage to other countries was in the process of being thwarted by foreign rivals like News Corp. So its star was turning into a cash cow. But where to reinvest?

The company was, and still is, a brilliant marketer of DIS-themed products. But Euro Disney was a very expensive disaster. The DIS brand had little appeal to boys (Jack Sparrow was its only male hero). Its movie business was lackluster. And, a particular irritant to me, the company was much more interested in providing information to Wall Street analysts than to shareholders, compelling us to pay brokers for information about our own company. Btw, I’ve found this to be a sure-fire indicator of incompetent management signaling to employees how to behave.

The Eisner formula: In 2005, DIS acquired Pixar. In 2009, it bought Marvel, not only giving its movie business another shot in the arm, but providing a whole slew of male characters to more or less double the overall DIS brand’s appeal to children. Then came Lucasfilm and Fox–and, with no more worlds other than streaming to conquer, Iger stepped down. He yielded his place to Bob Chapek, the architect of DIS’s parks expansion.

DIS is far larger today than it was in 2005 but the same issue of where growth comes from in a mature company remains. Almost by default, the answer–ex streaming, which has proved to be less growthier than anticipated, is: the parks. And, by a wide margin, the biggest of them is Disney World in Florida, where DIS is already one of the state’s largest employers and taxpayers.

Ron DeSantis

DeSantis, the governor of Florida, has launched his campaign for the Republican presidential nomination on the race- and gender-hatred platform of the right wing of that party. In implementing this strategy, he has decided to single out and demonize DIS as “woke” for its support of the LGBTQ community. Backed by a surprisingly complaisant legislature, he has begun to remove government development incentives that encouraged Disney from creating and expanding its theme park in Florida. He’s also threatened new Disney World-targeted regulations that would discourage visitors from going to/staying at DW.

DIS is one of the largest employers and taxpayers in Florida. So I’m not sure how shooting your home state in the fiscal foot is supposed to enhance your attractiveness as a candidate. I imagine that the thought (if any) behind the move is that DIS has so much invested in Florida that it has no choice but to quietly accept whatever DeSantis does–or at least that he will personally gain more than the state might lose. From a solely DIS point of view, the recent plunge in DeSantis’s national popularity suggests he’s likely to be back as governor relatively soon.

why investors might be interested

Before the DeSantis attack, it seemed to me that DIS was in the same sort of situation today that it was two decades ago–it’s a collection of mature/maturing businesses, a firm without much growth focus, and with its hotel/theme park segment intended to serve as the main vehicle for reinvesting cash flow. The issue with this for investors interested in capital gains rather than dividends is that hotels/parks is a mature, highly-cyclical–in other words, low PE–endeavor. Arguably, earnings gains and PE contraction would offset one another.

These dreams of early retirement now appear to be out the window. To me, the issue isn’t just DeSantis’s actions. It’s also the probability of his imminent return and the overwhelming support his agenda has had in the Florida legislature. Despite a half-century in Florida, DIS, it seems, has no friends in high places.

The DIS response, so far:

–firing the CEO whose main expertise is hotels and theme parks–which is basically Disney World, as I see it

–cancelling a billion dollar+ project to transfer support staff from California to Florida, with other investment in the state presumably on hold for now

–a lawsuit to reverse DeSantis’s actions so far

–a more aggressive than anticipated staff reduction throughout the company.

An investor’s hope would be that the DeSantis attack has forced the DIS board off cruise control and a fundamental rethink of the company’s growth plans is underway. Slimming down corporate staff could be an early sign of this.

As a potential investor, I’m still on the sidelines. I owned the stock for about ten years, from the Marvel acquisition to 2016, when I thought it was fully valued at just south of $100. Yes, I missed the streaming spike. I haven’t done the work to decide what price I would pay for the stock. My preliminary guess is that we’re around fair value now, assuming that some non-damaging resolution to the Florida situation is achieved. Even if so, the road to resolution is likely to be bumpy. At this point, I’d only get really interested if the stock sold off considerably on one of those bumps.

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