In this episode of Industry Focus: Consumer Goods, Emily Flippen and Motley Fool contributor Dan Kline take a deep dive into Disney (DIS 0.24%). They discuss its various properties -- parks, Marvel Studios, streaming service, ESPN, etc. -- and how the shutdown is impacting each of them. What does the balance sheet tell you about their position, and what does the future hold?
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This video was recorded on April 28, 2020.
Emily Flippen: It's Tuesday, April 28, and I'm your host, Emily Flippen. Today I am, again, joined by Dan Kline, and we're going to be talking a deep dive into probably one of -- I'm not sure "prolific" is the right word, but definitely profitable consumer goods companies out there, and that's Disney. Dan, how are you feeling?
Dan Kline: My voice is a little worse for wear. I'm not sure if I saw you yesterday or six months ago or what -- it's hard anyway in Florida to know what time it is or what day it is, now it's gone full-on bizarre, where if I came home and the house is full of Halloween decorations, I would not be surprised.
Flippen: Yeah, I think that's true for all of us. And, in fact, this conversation we had about Disney we had over The Motley Fool Livestream, that's available for our subscribers. And we had an hour-long conversation about Disney. And I do not remember, it must've been last week, was it -- I can't remember if that was this weekend or last week, I mean, it's all meaningless to me now.
Kline: Yeah, it was last week. And again, at least you have temperature changes. Like, here, other than the fact that it's getting slightly hotter, which makes my outside workouts even less pleasant. But I had a sobering thought today is that this Saturday is the Berkshire Hathaway annual meeting. Last year, I was forwarding stories to our partners on that meeting from Epcot. I'd be in various lines, I had set up all my emails, our various writers were sending stuff, getting edited, sending it out. This year, I was actually going to be in Omaha at the meeting, and instead I am in a tin room in a co-work that's 96 degrees, so.
Flippen: It's horrible. Not a great trade-off there. [laughs]
Kline: But happy to be here and talking with you about Disney, one of my favorite, albeit beleaguered, companies at the moment.
Flippen: So you were, clearly, you said last year at Epcot. So I presume that you're a relatively frequent Disney attendee, living there in Florida especially.
Kline: Yeah, I'm an annual passholder, and we have a second home, a modest second home that's maybe 20 minutes from the parks, little closer to Animal Kingdom, but basically 20 minutes from the other three parks. And we'll go down there for a week in the summer with my son not having school, and we'll just do, like, the afternoon at Epcot, the morning at Animal Kingdom, like, there's no pressure when you are a local. I haven't spent a lot of, like, full days at parks, unless I'm there with friends from out of town, like, when Industry Focus's own Matt Frankel was in with family, we spent a very crowded day at Walt Disney World with his kids. And amazingly, that wasn't all that long ago, that was in March, and it seems like a lifetime ago. We knew COVID-19 was a thing, but the parks were still unbelievably crowded at that point. And now, of course, the parks are closed, and Disney is losing somewhere between $30 million and $40 million per day.
Flippen: Yeah, when we prepared for the deep dive last week, Dan, I was shocked at how much revenue from Disney comes from their domestic and international parks; it makes up nearly a third of their total revenue.
Kline: Yeah. And then, when you look into adding movies, and largely the movie business has shut down, Disney was unfortunate to have one of its Pixar releases come out right before we knew we should be delaying movies. So they had a movie that essentially got sacrificed to coronavirus. It's about two-thirds of their revenue that's more or less on hold, which is troubling and frightening, except I 100% believe, and I'm going to say this at the top of the show, and I'm sure I'll say it many times, I fully believe that there will be a massive comeback at some point whenever life turns to even some semblance of normal, because people want to go to Disney parks. If they have to pay more to go to a socially distanced park, they're going to do that.
I know there's going to be people with money troubles, I know there's going to be other issues, but I am not at all worried about Disney business. Even when times are bad, people still go see Marvel movies.
Flippen: Yeah. And Disney had a number of what were supposed to be big theatrical releases this year, I think, Mulan and Black Widow being just a couple that now are being pushed off until presumably later in the year.
Kline: Yeah, and I would worry a lot if I had mid-tier releases, because we're going to lose some movie theaters. People are going to be afraid to go out even if, you know, there's a vaccine or there's other treatment, especially at-risk population. So Grandpa might not be taking the kids to see Mulan. But that said, I'm not worried. Disney has a murderers' row of intellectual property; these are the biggest movies, and people will find a way to see them. I think we might also see some interesting day and date online releases where you can pay an absolute premium to watch a movie at home while it's in theaters. I think that could be offered in markets where either theaters are still closed or there is reduced capacity.
I was shocked to see that, it's only an estimate, but that Trolls, a movie -- not a Disney movie -- a movie I cannot imagine anyone seeing -- did like $40 million in call it, pay-per-view or on-demand or however you want to classify it. And that, to me, shows that especially with everyone stuck at home, there actually might be some room to do some movie releases. You know, we can't all watch The Last Dance every night. [laughs] So you know, there's a lack of programming. And if Disney put some stuff out, if we get a protracted shutdown of theaters, I'm not so sure it will fail.
Flippen: And that just without even touching on Disney+, I mean, is it theoretically possible that they could be releasing some of these things to the Disney+ subscribers, or would that just hurt them too much in terms of total revenue?
Kline: Yeah, I mean, I don't think you can take a Black Widow, which is a $1 billion theatrical film, and give it to people on Disney+ for free. I think you could release Black Widow in the fall and accept that in certain markets, theaters will be limited capacity or certain populations will be urged not to go. And then, maybe you make it available at home for $40 or $60 or whatever the number is. You've got to come up with something that protects your box office, but there are a number of lesser releases from other companies. Universal is putting out SCOOB!, its a Scooby-Doo movie, which I think is a cartoon, but it might be live action, I'm not entirely up to date on the Scooby-Doo universe or Dooniverse, as it would be, though I have met Scooby-Doo at Universal Studios. You know, they're going to release that to on-demand. And that's the kind of movie -- parents are looking for something to do, if you're not spending money on a lot of things you spend money on, it's not crazy to fork over $20, even $40, to kill an evening.
Flippen: Yeah, I think many parents, as the launch of Disney+ has proven, are perfectly OK with paying whatever the amount is necessary to entertain their kids, and obviously Disney+ is very cheap right now on a subscription level, but I could see a lot of potential pricing power coming from Disney+ at some point in the future.
Kline: I think people are underestimating Disney+. So Disney+ is at 50 million subscribers in March, and that's really before the coronavirus bounce, that was by adding eight European markets and India. Not a ton of promotion anywhere, not spending a lot of money. So 10 million to 50 million. It would not shock me, now here we are at the end of April, if Disney was at 75 million. But just at 50 million, that's $349 million a month, that's a bit squishy math because there's multiple price points. You could pay $6.99/month, you could pay $69/year, which is a little less, you could bundle with Hulu and ESPN+, but just pretending everyone is paying $6.99/month, that's $349 million a month or $4.18 billion a year.
If you double from 50 million to 100 million subscribers, which I think is fully plausible between just growth and adding countries, that would make Disney+ the company's biggest segment. And right now, it's not even a stand-alone segment, [laughs] it's grouped in with some other things. So this is something you have to be excited about.
And Disney, it's really important to point out, does not have to spend the same amount of money Netflix does. Netflix has to throw a ton of content at the wall and see what sticks. Disney can basically say, "Hey, we own Marvel, what's a character who didn't get enough screen time in The Avengers? Oh, people like Loki, let's do a short series with Loki and put him up." "Let's have a series set in three different Star Wars places," or whatever it is. The ability for Disney to guarantee hits is really, really strong. And I think you cannot undervalue how much less Disney is going to have to spend to keep Disney+ interesting for adults. The kids, their archive is going to be more than enough.
Flippen: I have even squishier math here for you. [laughs] When Disney+ was first launched by Disney, they said a couple of things. One, they expected Disney+ to be profitable by 2024. That means that until 2024, they're losing money on the venture, but by 2024, the company believed it could have 90 million subscribers. If I make the assumption that in 2024 they have 90 million subscribers -- and I kind of agree with your analysis that I think that that number might have been lowballed, especially given the crisis we're in today -- but if I assume 90 million subscribers in 2024, and let's assume they increase the price up to a Netflix-level $14 a month, somewhere around there, which I also think is completely possible, then Disney+ itself could potentially be a $15 billion business just in revenue each year. I mean, that's a big opportunity for them.
Kline: I don't think they're going to do that with the price, I think they're going to inch the price up to $9.99 maybe over the next three years. Would it shock you, Emily, if they were at 90 million subscribers now? It wouldn't surprise me at all.
Flippen: I think I would be a little bit surprised, just because those numbers, they had for five years out, only a couple of months ago were 90 million and that was worldwide. So I would have to ask myself, why? I mean, the coronavirus is definitely a big boon for them in terms of subscriber numbers, but did they really lowball their own estimates that badly that they reached the number they expected to have in five years in six months?
Kline: I think they lowballed it, and also, it's a really tough thing to predict, because there was a fair question of no matter how good this is, do people want another streaming service? You know, everybody was talking about The Mandalorian when this came out, but it was still only 10 million people who actually had Disney+. So there were a lot of people talking about Mandalorian who maybe hadn't seen it -- or perhaps our office is over-indexed for Disney+ subscribers, that's also certainly possible.
Flippen: Yeah. And I don't want to understate the opportunity that Disney+ is, because it truly is a great growth driver, but I think I tend to be a little bit more skeptical than you do about their business, at least over the next year or three, let's say. Because Disney+, again, is, it's going to be a loss-leading business for Disney, they're losing money on that venture until 2024. In the meantime, a lot of really high-margin businesses for them, including their cable media, broadcast media, those are things that will probably systematically decline over the next few years, that make up a quarter of revenue for Disney. As people start cable-cutting, they're no longer paying for a lot of their services, and that's without even getting into the troubles that ESPN has been facing. So I think I tend to be a little bit more tempered.
And the opportunity for Disney+ is great, but ultimately, people are accustomed to Disney being a super-profitable business that generates a ton of free cash flow. And with the parks closed for the most part of this year, with their legacy businesses sequentially declining, it could be a really big problem over the next few years if Disney doesn't generate cash.
Kline: You're going to absolutely see a rough few quarters. [laughs] There's very little advertising now. So even when ESPN does have a hit like The Last Dance, they're probably not charging as much as they would be able to for those ads, simply because there just isn't a market right now. Every commercial is, you know, people applauding first responders or companies saying "thank you." There's not a lot of effort to sell goods. That's bad for ESPN. Cord-cutting is not a great thing for ESPN, because it is the network that you pay the most for on your cable bill and you have no choice about whether to get it. If you get a streaming service, even if that's live TV streaming, you can generally opt out of ESPN.
That said, I think there's a pretty big bottom for ESPN. Sports fans are going to find a way to get ESPN. You can't tell me that anyone who likes the NFL or the NBA isn't going to find a way to get ESPN. And I think that eventually means there will be an over-the-top streaming version of the actual ESPN channel itself.
Flippen: I will take a quick moment to note that one analyst here, who unfortunately isn't here for the conversation, but has followed Disney as part of our Entertainment service, that's Ben Ra, tends to take a slightly more conservative view. And I'm playing devil's advocate here for a bit, which is to say that he saw the decline in boxing. So when boxing moved from being related to your cable to purely just pay-per-view, a subscription-level service, I mean, it saw a huge drop-off in the number of viewers, and now it's become a really small niche audience as opposed to what was once potentially a national sport.
Kline: So the problem with that comparison is, boxing also disappeared from free television. So people would buy pay-per-views when they could see people build up their audience. You know, you saw Mike Tyson fight for free on Wide World of Sports, you started to like him, and then you're willing to buy pay-per-view to see him fight for the title or whatever it is. Football is not not going to have a free presence, there's always going to be, you know, two of the three, you know, ABC will have it, CBS/Fox, well, whoever, will have a football presence. But if you're a fan of a team that plays on the ESPN Sunday-night game, you're going to want that, if you want the wall-to-wall coverage. And that could be true of NBA or whatever sports, right? All the college sports. I don't think Alabama fans aren't going to get the SEC Network, which I believe is an ESPN property, just because they drop their cable. They're going to find a way to get that content.
And the audience is going to get smaller. I don't disagree with Ben; they also might be an audience that pays more for the privilege or becomes a more targeted advertising. I'm not saying that division is not going to shrink, it absolutely is going to get smaller, but I don't think it's going to be this huge collapse.
I also think theme parks are going to have a really bad year, maybe a really bad time through whenever there's a vaccine, but that said, people are going to go to Disney World, and Disney can essentially [laughs] charge them whatever they want, as has been the history.
Flippen: Yeah, and I noted this when he did the live call, but there's been a lot of impact across many different industries. And the cruise industry, let's use that as an example as one, because it's top of mind right now, where cruises are offering some amazing discounts to virtually everybody who will book a cruise, even if it's for a year out, just because they're trying to get to show some demand for cruises that will exist after this virus. And they're cutting prices dramatically as a result.
Disney, while they're not selling tickets at the moment, not to my knowledge at least, they're not cutting their prices trying to get someone to buy a ticket for October or November, because that would dilute the brand experience. I think it is a testament to the fact that management thinks that when this virus has passed and once they're able to reopen their parks that people are going to want to come, and they will pay full price for that experience.
Kline: Yeah, I'm pretty sure you can still buy tickets online. Most ticket packages aren't dated, though it costs more for certain dates, it's a little bit confusing. I think they're still taking hotel reservations for the fall. This is how confident they are. I'm an annual passholder, I have a platinum pass, which is the next-to-best pass, they said to me, "Hey, we're going to stop collecting money from you, but we're not going to extend your pass." Meaning, if they kept taking money from me, they would push the end date of my pass further and further off, which would, of course, lock in my price. They're so confident that passholders, who are very important to the Disney bottom-line, that passholders will renew, that basically my clock is ticking. So that means they'll have an option, when it's my time to renew, if they're still closed, they might offer me a deal; if they're open, they might raise prices, as they have done every single year since I've had a pass. So they are very confident that people are going to pay.
And I also think there's a clear blueprint for Disney strategy on how to open in a socially distanced world. I mean, there's been a lot of talk about it on the various theme park websites, but they could open at half capacity but charge a premium price. That's essentially what they do with Mickey's Not-So-Scary Halloween Party and other events like that, is charge you a second ticket to come back from 6:00 to midnight with less people in the park. They have a lot of ways to make money, because they have the premier brand, and I don't think that changes. People still want to ride the new Star Wars rides.
Flippen: It's hard to get all of Disney in this 20- to 30-minute talk we're doing here, Dan, but I do want to touch on Disney's cash position, because them not collecting, potentially, I mean, cash from you for your annual pass during this crisis, means that presumably they're not over here trying to get every penny into their coffers as possible right now. But at the same time, while they do have a really strong cash position, I think, nearly $7 billion in cash on their balance sheet at the end of the last quarter, and they are securing further lines of credit, they still are a heavily indebted company. I think they recently announced a plan to add on, I think, $6 billion of debt, which would potentially expand their net debt position to over $50 billion. I mean, that's a lot of debt.
Kline: Yeah, most of that is the Fox acquisition. And absolutely, it's troubling, you don't want to see a company take on this much debt, especially when you know it might not recover for a year or even longer. That said, in the long-term much of that debt is the Fox acquisition. And ultimately, I fully believe this just makes Disney a longer-term play, because it is going to take a while. And, look, they still have to invest, they still have to build new theme park rides, because Comcast and Universal, they're not going to stop building new theme park rides.
So there's absolutely a cash pressure on the company to get back to business. And some of it's going to be, movies are unpredictable. There might be a huge demand, and by the time Black Widow comes out, instead of that being $800 million to $1 billion movie, maybe it does $1.5 billion, that's an extra few hundred million in profit. There's a lot of volatility to parts of Disney's business that could help this position, but you don't like to see any company just be bleeding money. And you know, look, they took an extra $5 billion credit line, that's a one-year revolving line with an option to extend it for another year, you don't like to see any company have to do that, but I'm not worried about Disney not surviving this.
Flippen: Yeah, I think I've been overly cautious, let's say that, because as much as Disney's share price, just on the equity basis, has fallen, I think I can see a very realistic near-term future in which that pressure continues, but I do agree that long-term, there is no replacing Disney right now. So before we leave, I just want to leave off one opportunity for you. Since I was so overly cautious [laughs] during this recording, is there anything, any last comments, any last insights on Disney that you want to leave our listeners and Disney investors with?
Kline: Yeah. I mean, right now, my biggest question is the CEO, it's Bob Chapek. And there's been a lot of talk that, well, Bob Iger is really running the show. And he, kind of, stepped up to executive chairman and is still very much day-to-day involved. I'm not so sure if Bob Iger walks away at the terms. He tends to be someone really good about finding an excuse to stick around. But Bob Chapek came up through the system, there are other potential successors in line. Kevin Mayer would be a good example.
And it's one of those things where I need to see the new CEO make some decisions, see what he believes in, see if he believes in investing, see how he feels about pricing on Disney+. I'm not worried, but when any company goes away from a successful CEO to someone new, that is something to monitor and track, especially as we're dealing with these unprecedented times.
Flippen: Well, with that, Dan, thank you so much for joining me for what is a second time in [laughs] about a week to talk about Disney. I really appreciate it.
Kline: And I'll see you in a little while for Motley Fool Live.
Flippen: Yes. So we'll be talking not Disney this time, but maybe we should be talking Disney. [laughs]
Kline: Very much not Disney, I believe is the plan. [laughs] So thank you, Emily.
Flippen: Thanks, Dan. Listeners, that does it for this episode of Industry Focus. If you have any questions, you can always shoot us an email at [email protected] or tweet us @MFIndustryFocus.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear.
Thanks to Austin Morgan for his work behind the screen today. For Dan Kline, I'm Emily Flippen. Thanks for listening, and Fool on!
