On the politics side of things, which is not my area of expertise, it strikes me as very odd that Ron DeSantis would launch his campaign for president by setting out to wreck the profit prospects of one of his state’s biggest taxpayers, employers and tourist attractions–Disneyworld.
I find it just as strange that despite DIS’s half century as a key corporate citizen in Florida, there wasn’t any legislative pushback against implementing DeSantis’s vindictive agenda. Despite its central role in Florida’s economic growth for a half-century, DIS seems to have no friends in high places there (As a side note, I also find it curious that so many prominent KKK-ish politicians are spawned by Harvard and Yale law schools.)
Contrary to his intentions, however, the DeSantis move may turn out ultimately to have been a considerable gift to DIS. …in the form of a wake-up call.
DIS is a relatively mature company. (Note: I became a DIS shareholder when it bought the Marvel shares I held. Despite some misgivings (tomorrow’s post) I saw the potential for change in what had been an arrogant, elitist, totally inept prior management, so I bought a bunch more. I sold at about $90, just before the huge leap the stock took on streaming potential.)
At one time, the growth engine was ESPN. But by the time DIS acquired Marvel (2009), cable had begun its slow contraction. Very strong resistance from the incumbent sports news broadcaster, Rupert Murdoch, in the UK made it clear that international expansion of ESPN sports network was not going to happen. So ESPN became a cash cow.
Marvel, and the subsequent purchase of Lucasfilm (2012), did two things for DIS. Along with Pixar (bought in 2006), they revitalized the DIS movie business. They also provided a stable of male characters to complement DIS’s predominantly female heroes and villains–with the idea of boosting merchandise sales and welcoming boys to what had been female-themed amusement parks (yes, DIS had Jack Sparrow, but that says it all). This created a huge one-time growth spurt to the media and parks businesses (ESPN had made 3/4 of overall DIS profits fifteen years ago). But that was well over a decade ago.
The third arm of DIS is the theme parks–Florida (by far the biggest moneymaker), California (the original), Disney Paris (the former ill-starred Eurodisney) and assorted ventures in China and Japan. Theme parks aren’t a particularly growthy business. They’re hard to manage, and they’re highly cyclical. As a result, the market tends to assign a low PE to their earnings.
For a while, streaming seemed to be the next big area for growth. The stock’s ride back down from close to $200 illustrates the stock market’s rapid discovery that, for now anyway, there are too many entrants and too few barriers to launching a streaming service.
This is also the reason, I think, that DIS decided that the best use of its cash flow would be to plow it back into the low multiple, highly cyclical, world of theme parks. …and into Disney World in particular. Probably it’s no surprise that the decision came from the chairman, Bob Chapek, whose previous job had been as head of the parks division of the company.
Enter Ron DeSantis, whose toxic politics poses two threats to DIS: the removal of tax benefits routinely given to businesses in Florida; and, more important, the damage to the worldwide DIS brand from adopting his race- and gender-hatred stance.
What has happened since?
–Bob Chapek is gone. If press reports are correct, it’s due in part to input from the CFO, one of whose jobs is to look at return on capital
–expansion plans in Florida have already been cut back
–most important, I think, is that DIS is cutting costs throughout the company. This is an important task for any mature company, but often overlooked because it’s hard to do, and it requires managers to admit to the slow-growth character of their enterprise.
DeSantis has forced DIS to take a hard look at itself that it probably wouldn’t have done otherwise. At the same time, he’ll be the focus of any blame for the cost-cutting campaign DIS is starting.