I’m currently in the process of liquidating everything that goes green, especially my US stocks. I plan to buy them back later, probably mid/end of summer (or whenever this madness is winding up). Disney may be the exception though for that very reason.
I got Disney + there. It’s actually a really good service. Could see it doing well.
I got it last night and had a poke around. I don’t have kids though and I didn’t see a whole lot of non-child related stuff (probably not suprising), I don’t see it replacing other services for me but I’ll certainly have it for a few months. I noticed most of the Fox stuff is on NowTV instead and I don’t know if they plan to move that to disney or just keep it purely disney stuff
Yeah in fairness I’m looking at it from a parents perspective. Looking forward to showing my kids loads of the Disney classics I enjoyed as a kid.
But it’s definitely got a lot more content than I thought. Obviously all the modern updates of the old Disney films but also a some things my wife and I fancy watching too.
I’m tempted by Disney shares, and Disney+ is gonna get huge take up but the park and film revenue is gonna take a huge hit for a while.
For Disney, the elephant in the room will always be Fox. It may have found a window during this “bear rally” to borrow some before their credit rating or something gets hit:
In a filing with the Securities Exchange Commission on March 20, Disney said it was offering $6 billion in loans, which bear an interest rate from 3.35% to 4.7% and are due from 2025 through 2050. The company says the use of the proceeds will be for “general corporate purposes, including the repayment of indebtedness.”
Disney is not in dire straits just yet. At the end of the last quarter in December, Disney held $10 billion in cash and investments.
But the problem is the company’s $38 billion in long-term debt. Last year, the company’s total borrowings more than doubled after it acquired Twenty-First Century Fox.
Fitch Ratings recently issued a negative credit outlook for Disney over concerns about how it will hold up with the economy while shut down. Disney said the measures to prevent the spread of the novel coronavirus are affecting the business “in a number of ways,” and that this “should be considered in connection with an investment in the notes.”
Irony aside, the acquisition of assets from Fox repositions Disney as a media powerhouse, like it was so many years ago. Beyond antitrust concerns (which I don’t feel will amount to much), the greatest issue outside of integration of paradoxical assets (dark themes vs. family friendly entertainment) is the deal’s structure. After all, Disney will be paying for Fox’s assets via a distribution of 515 million shares of stock.
But while that’s dilutive, using shares as currency to buy income-producing assets is historically a long-term win for companies. Dilution used sparingly and for cash flow is far more attractive than spending cash or using debt to buy things.
But it’s that latter part of the equation that has put questions into the deal. Disney has already said it plans to repurchase $10 billion in stock to help offset the dilution. However, the company will absorb $13.7 billion in Fox’s debt along with the assets.
Debt: An Ugly Word
Now, debt is an ugly word on Wall Street, and tossing around a nine-figure bomb like $13.7 billion will grab some headlines – providing Disney bears with fodder. But this is worth a deeper dive, because the headline number feels misleading.
I’ve just run a couple of scenarios through on Disney: 3 month Covid-19 impact and a 6 month Covid-19 impact.
I’ve looked at all four of their segments, Networks, Parks & Products, Studio and Direct to Consumer (Disney+ etc) and discounted their revenue and corresponding earnings relative to the reduction in business estimated in each.
I’ve assumed a increase in take up of Disney+ caused by virus but Parks & Products to be hit hardest followed by Studio segment, with Networks only modestly impacted.
I’ve then looked at what expenses they can cut temporarily and any debt refinancing that can assist.
I’ve also modelled a bounce in following 2 years when deferred films and content might generate excess growth.
Once I plug these in and use my most likely scenario. I get a DCF fair intrinsic value of $85 and a target price of $60 for Margin of Safety factor of 30% applied.
I’m a novice analyst so I need to be cautious in my modelling to play safe but taking everything into account, I can’t justify buying anymore shares at current $101 price
I’m uploading another video to my YouTube channel tomorrow walking through this if anyone’s interested, I’ll post a link once done
Though it’s all relative and subjectively objective (or objectively subjective), you should use APV instead of DCF to take into account Disney’s changing capital structure.
Looking forward to your video
Hey great article and I will look into this method more and see if I can get it set up and working Weill.
You’re right about subjectivity, of course there is skill and experience in using the right factors and assumptions in any calculation. That’s why I try and edge on side of conservatism to account for my biases and errors on the safe side.
What do you use yourself for stock analysis?
What do you think will happen to ESPN during the sports shutdown? That would be my major concern if I were a holder.
I factored in a 10% drop in Disney’s network division to account for sports postponement impacting ESPN for 6 monthd
Here’s my video analysis of impact the park closures etc will have on Disney valuation
So the Disney news confirms my concerns about the attractions having a sustained shutdown.
Disney has not been good for me… bought in at the high, topped up on the way down and probably further downside to come. Don’t want to put anymore into Disney so just sitting it out for the long run
If you’re patient there could be a chance at a good price, Disney+ looks good long term and they’ve reinvigorated themselves before. Just been overpriced and under diversified recently
Disney Plus subscriptions are now over 50 million
I’m one of them.
I find it incredible how my family has spent most waking hours with Disney+ on a screen somewhere, but crickets for Apple+ yet subscribe to both).
Apple TV powers Disney+ for us.
If I were Tim Cook I’d be buying Disney immediately at these prices.