my take on Disney (DIS)

Post the Fox Studios acquisition, DIS remains in three businesses:  broadcasting, theme parks and movies.  December 2019 quarterly operating income from the three (ex direct to consumer) was roughly $5 billion.  Of that, just under half came from theme parks, a third came from broadcasting and the rest from movies.

All three business lines have their warts:

–ESPN, the largest part of broadcasting, has long since lost its allure as a growth vehicle; ABC is breakeven-ish; I think there’s some scope for boosting results from Fox.  Pencil in slow/no growth

–theme parks are (were?) booming, but they’re a highly business cycle sensitive business.  We’ll see that, I think, in March- and June-quarter results.  so even though it’s Disney we should apply a discount multiple to these earnings

–movies are traditionally a low multiple business because of the irregularity of new releases and their typical hit-and-miss nature.  DIS has been exceptionally good for a long time under Bob Iger (it was pretty awful before him), but this is still inherently a low multiple enterprise.


This is the main reason the stock spent years bouncing around the $110 level with flattish $10 billion, $6 a share, in earnings.  In the era of human analysts, it wasn’t just the earnings that held the company back.  It was also knowledge of the slow demise of ESPN, the (in hindsight too conservative) sense that theme parks were nearing a cyclical peak, and the idea that the company’s incredible movie hot streak might come to an end.

Then there’s the streaming business, where–to pluck a number out of the air, DIS is spending 10% of its operating income to develop.


A couple of months ago no price seemed too high for Wall Street to pay for Disney+, with the stock peaking at $153.    If we say $25 of the rise was due to streaming, at the top the market was valuing Disney+ at $40 billion+, or roughly a quarter of the value of Netflix.

The stock has fallen by about 40% since.

Now, hang onto your hat:

If we assume that the implied value of Disney+ has fallen in tandem with NFLX, it’s now valued at $32 billion.  This gives a residual value for the rest of DIS of about $140 billion.

That would imply a multiple of 13x current earnings–or, alternatively, an assumed 20% decline in profits.  The decline would likely be mostly (I’m assuming entirely) in the parks and movie divisions, implying that area’s income would fall by somewhere around 30%.

So–in this way of looking at things, we are assuming substantial success for Disney+ and a decline in the most cyclical businesses of roughly half what the market is assuming for companies like Marriott.  It would be cheaper to create a “synthetic” DIS out of NFLX + MAR shares, although what would be missing would be the Disney brand.

My conclusion:  Mickey and Minnie aren’t screaming “Buy me.”





the struggle for Starwood Hotels: Anbang vs. Marriott

I began following the lodging industry in the early 1980s.  It was an important time.  The US was completely covered with mid-range hotels.  Lodging companies were forced to look for growth in two ways:  segmenting the market (a sure sign of maturity) by adding luxury and no-frills chains; and expanding internationally.

Today, 30+ years later, the international hotel industry is a whole lot more mature. Growth in any form is hard to come by and where the big players are starting to buy each other to achieve market power by being bigger than remaining rivals.

That’s the rationale for Marriott (MAR) bidding for Starwood (HOT), a company about a quarter of its size.

The prize:

–the HOT reservation network

–the HOT loyalty program

–an extensive hotel network

–a skilled staff.

Cost savings from the combination, which MAR now estimates at $250 million, aren’t that big, given a bid for HOT of close to $14 billion.  This is all about obtaining a strong reservation network/loyalty program and achieving gains in relative market share.

a second bidder

Over the past weeks, a second has emerged–Anbang Insurance, a Chinese financial conglomerate.  It had expressed interest in HOT before but had hitherto been unable/unwilling to outline financing details.  Anbang is probably best known in the US for buying the Waldorf Astoria in Manhattan for close to $2 billion last year.

Anbang cash vs. MAR stock

MAR is mostly offering its stock, with a little cash added.  Anbang, in contrast, is offering all cash.

Anbang’s cash is both a weakness and a strength.  The company is publicly listed only in China.  Restrictions on foreign ownership and on foreign trading make its equity completely unattractive to potential holders outside the mainland.  On the other hand, there’s no question about what the offered equity is worth.  Financial theory suggests that MAR’s management should only offer stock if it believes–and the MAR management is very shrewd–is overvalued vs. HOT’s.

value to each bidder

For MAR, HOT is a way to increase its market power in a mature industry.  For Anbang, HOT is a way to make a splash on the international scene, to get a vehicle for expanding/upgrading its hotel interests in China, and possibly taking a step toward stamping itself domestically as a national champion for technology transfer from the rest of the world.

My hunch is that HOT is more valuable to Anbang–a lot more–than to MAR.

industry consequences

A successful MAR bid is a step toward industry consolidation, implying sharper competition among remaining hoteliers and, possibly, somewhat higher prices for you and me when we travel.

Anbang success may mean less opportunity for foreign hotels in China but more competition elsewhere.