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Investors Shouldn't Count Disney Out

By Brian Withers and Matthew Frankel, CFP® - Mar 13, 2021 at 7:35AM

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The House of Mouse will emerge from the pandemic even stronger.

Walt Disney (DIS 2.28%) has had a rough go of it as management closed its theme parks temporarily due to the coronavirus outbreak. Even with the parks back open, traffic still hasn't returned to anywhere near pre-pandemic levels. But investors shouldn't count out this high-quality entertainment conglomerate. On a Fool Live episode recorded on March 3, Fool contributors Brian Withers and Matt Frankel discuss how the House of Mouse will emerge from the pandemic stronger than ever.

Matthew Frankel: But anyway, let me get it for one that I'm happy to report that I did not delay on, and that is Disney. Disney, I loaded up on at the start of the pandemic because I knew from the start it was going to emerge as a stronger company afterwards than it went in. I'll tell you why.

Just looking at the numbers, the numbers look bad when you look at the company's earnings report. This was Disney's first fiscal quarter. They use an odd fiscal year. First, the numbers look bad. Revenue was down 22% year over year in the quarter that ended in January. Adjusted EPS was down 79%. So their earnings were one-fifth of what they were a year ago. They had negative free cash flow. [The] reason for that is their theme parks aren't making money right now. They said their theme parks cost them $2.6 billion in operating income last quarter. That's a big impact.

People who live near Florida like me and have been to Disney World don't often remember, Disneyland has been closed since March. That one is still closed. Their cruise lines are still closed. Disney World, which was pretty bustling when I went down there, is still at a fraction of its normal capacity. Their theme parks are just not making any money right now. I know they didn't foresee the pandemic coming. They couldn't have timed the Disney+ launch better.

I think Disney+ launch, I want to say it was October of 2019. It was toward the end of 2019 when it launched. At the time they launched, they foresaw 60-90 million subscribers by 2024. They have 95 million subscribers already. They blew their five-year goals out of the water within a year. That's pretty impressive in my view. Now, they're projecting that it's going to be in the 200 million customer range by 2024. Including their other streaming services like Hulu and ESPN+, they're expecting their total customer count to be in the 300-350 million range by 2024.

That's a multi-billion dollar stream of recurring subscription revenue. Long-term, the parts of their business that are hurting right now are going to be just fine. Disney World is going to have just as much demand as ever, same with Disneyland, same with their cruise lines eventually. It might take a little while to come back to pre-pandemic levels, but it will get there. They are going to have the same great business with all that tremendous intellectual property, their movie business, their cruise business, their theme park business, and now they're going to have this streaming service that's going to be five times the size that it was originally thought to be. They're going to have the streaming service on top of that. That's why I said they are going to emerge from the pandemic a much stronger company than they went in.

I'm watching their reopening progress. Disneyland recently recalled some of their employees finally. They're hosting, I believe, a food festival there coming up soon. It's still no clear reopening timetable, but it's got to be pretty soon. Florida is going to go to higher capacity in its theme parks. Disney+ is obviously just powerhouse right now. They're going to release a few other movies, direct-to-consumer. Remember, last year they charged people $30 to see the Mulan movie, which my wife and I paid for. I mean, they're really doing a great job of monetizing it in ways that other streaming platforms aren't.

I can't be happier. Well, I wish I would have put some of the money into Shopify, too, but I'm thrilled that I put a good chunk of my portfolio into Disney at the onset of the pandemic, and I'm not planning on selling anytime soon. I think they're going to be one of the biggest reopening plays that there is.

Brian Withers: Yeah. I remember talking to my older son about Disney. I've been investing with them since 2004. One time he was investing in Disney and I said, "Alex, why Disney?" He's like, "Why wouldn't you invest in Disney?" I think that's always the case for them, they've been incredibly strong. They really know how to monetize their content.

I don't know about you, Matt, but I'm anxious to get out[side]. I know there's a bunch of people that are anxious to travel, and folks with kids who have been cooped up doing homeschooling. I wouldn't be surprised if a trip to Disney is in the works.

Frankel: I took my kids to Disney in September. I got to say, I felt safer there than I did at my local grocery store. They were doing such a great job of [social] distancing. If you've been to Disney World, you know the lines can get really long. Everybody was six feet apart. There were crew members every so often, keep people spaced, because six feet between people makes the line even longer. They were there keeping people in order, telling them where to go.

The food was on mobile order. It was so quick. I hope they keep that after the pandemic because the quick-service restaurants at Disney World can get busy. I thought they were doing a fantastic job. Like I said, I'm very optimistic in the years ahead.

Withers: They're definitely a wonderful stock to own.

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