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Resilient Disney set for a rebound

Disney has absorbed the full force of the pandemic, but it’s brand power and underlying assets are strong.

Walt Disney Co. is an example of a dominant global brand.

The company is almost 100 years old and in any market, language and currency, its characters, themes and family-friendly fare strike a universal chord. So even with key parts of its business shut down, the shares have held up reasonably well, off 19% year to date as of the time of writing, even as its dividend has been suspended.

But Disney is poised to rebound when the economy returns to some semblance of normal.

In Shanghai, tickets for the reopening of its theme park were sold out within minutes of being made available online.

The  park reopened in early May with new rules. Everyone is wearing masks. Visitors undergo a temperature screening at the entrance and maintain distance while waiting in line. There are hand sanitizer stations at restaurants and stores. The site is limited to 30% capacity. Photo ops are available if the Disney characters are wearing a full costume, because underneath they can wear protective masks and clothing.

Some of this was pent-up demand after several months with limited movement and social interaction. But it also shows how much we crave the comfort of normal routines and familiar products, which is one of the powerful attractions of multinational brands. They are a reassuring purchase, whether it’s a Big Mac and fries, or a photo with Mickey Mouse.

Pluto disney
Pluto is one of Disney’s iconic cartoon characters. Credit: Craig Adderley Pexels.com

Here  are the Disney  details. All figures are in U.S. dollars.

Background: Walt Disney Co. (NYSE:DIS) is a worldwide entertainment conglomerate founded in 1923. Its programming is synonymous with family-friendly animated and live action fare. At the end of 2019 it employed 223,000 people and had revenues of $69.5 billion.

Disney’s assets include theme parks and resorts, a cruise line, ABC Television, cable TV stations such as ESPN, and film studios that include 20th Century Fox, Pixar, and Lucasfilm.

Performance: The shares hit an all-time high of $153.41 last fall but then slumped sharply starting in mid-February, briefly falling below $80 at one point.

Operations: Disney operates in four segments:

Cable and broadcasting: This segment generates 37% of revenue. It includes the ESPN, FX, and National Geographic cable channels, as well as ABC TV. It did well in the first quarter, with revenue up 28%.

 Theme Parks: This includes Disneylands, hotels and resorts, and the Disney cruise lines. It normally produces 35% of revenue, however sales fell 10% in the first quarter, even though most of the impact occurred the last two weeks of March. The second quarter will be a write off.

 Studio Entertainment: This sector normally represents 16% of revenues. It makes and distributes movies through Walt Disney Pictures, 20th Century Fox, and others. It also produces and licenses theatrical productions. First-quarter revenue grew 18% as theaters were open through mid-March. Looking ahead, film releases will be delayed, and many theatres will remain closed.

 Direct to consumer: This is the smallest segment at this time, accounting for 13% of revenues. But it has a lot of potential. It includes the newly launched Disney+ streaming service and others, including Fox and National Geographic. Disney+ has been a home run. It signed up 10 million subscribers on launch day in November. By early April after a roll-out in Western Europe and India, paid subscribers hit 50 million.

Recent developments: It was no surprise that Disney reported poor results in the quarter ended March 30. It suspended forward guidance, eliminated its dividend to save $1.6 billion in cash and laid off 120,000 employees. Earnings fell 93% in the quarter and Disney arranged a $5 billion credit facility with Citibank to give it flexibility going forward.

Outlook: Disney has absorbed the full force of the coronavirus pandemic, making it impossible for the company to operate several core businesses. You can’t go to the movies or the theatre. Theme parks and resorts have been closed. Cruise ships are tied up at the dock. The pandemic has reduced advertising on its cable channels and some, like the ESPN sports network, have little live programming to show.

The longer-term picture is brighter. Disney’s film, TV, and entertainment assets are the best of the best, spinning off cash year after year. For example, the 1994 animated hit The Lion King has generated $9 billion in global box office receipts from its film and theatrical versions. Disney’s all-time greatest hit is Snow White and the Seven Dwarfs, which debuted in 1937. Snow White earned an inflation-adjusted $982 million through the end of 2019.

snow white disney
The 1937 film Snow White and the Seven Dwarfs is Disney’s highest grossing movie of all time. Source: Walt Disney Studios

There are other positive signs including the reopening of the Shanghai Disney park in early May and Florida Disney Springs last week. Disney Springs is a 120-acre facility outside of Orlando that is part of Disney’s area attractions. It features outdoor shopping, dining, and some entertainment. The opening will show how quickly people will come back and what steps are needed going forward.

 Conclusion: Recovery from the coronavirus will take time, but Disney’s assets are as good as it gets. It’s worth noting that billionaire investor George Soros bought $6.4 million worth of Disney stock earlier this month.

(This is an edited version of an  article appeared in the May, 25  2020 edition of the Internet Wealth Builder.)

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Adam Mayers writes about investing and personal finance. He is a contributor to the Globe & Mail’s Globe Advisor and a contributing editor to Gordon Pape's Internet Wealth Builder newsletter. Adam was Business Editor and investment columnist at The Toronto Star and is the author of six books.

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