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Disney: a 100-year-old business as relevant as ever

05 May 2021 Old Mutual Wealth

A well-timed and executed digital strategy pays off during pandemic

The Covid-19 pandemic has crippled some industries and brought giants to their knees. Despite this, well-run companies with clear and well-executed strategies have emerged from the crisis more robust than they entered.

A diversified company with an eye on the future has been crucial to entertainment group Disney’s performance, says Tasneem Samodien, Research Analyst at Old Mutual Wealth Private Client Securities. “The company which has managed to navigate several crises over the past century has seen its share price surge 30% in the past year.

“This is thanks to its diversified income stream and well-timed digitisation strategy providing not only a cushion to weather the pandemic’s knocks but a launchpad from which to soar into a new era of growth,” she says.

Disney was forced to shut down its profitable theme parks and had no access to the box office because of the lockdowns. Yet, with half of its business severely hamstrung, Disney’s well-timed digital transition softened the blow of what could have been a crippling crisis.

“Diversification and effective execution of its digital strategy by a competent management team saw the entertainment giant increase its value by a third,” says Samodien.

She says that the financial damage to Disney’s parks because of the Covid-19 pandemic cannot be ignored.

“A division that reported an operating profit of US$6.8 billion in 2019 (50% of Disney’s total operating profit) generated an operating loss in 2020, and it is unclear when this business will operate at full capacity in the future,” she explains.

Beyond this, with cinemas and theatres closed, Disney has been unable to air blockbuster movies, which are catalysts for its parks and merchandise sales. Yet, it is still valued at 30% more than a year ago.

While Disney’s performance is mainly due to its diversification strategy, it is worth noting how its main digital business differs from first-mover Netflix, says Samodien. Netflix has more than 200-million subscribers worldwide.

“Whereas Netflix feeds the binge-watching appetite, Disney has taken a different approach, relying on its wealth of popular content and releasing series over time and creating demand, which — very importantly — holds onto subscribers for lengthy periods of time.”

Samodien says that Disney enjoyed 10 million subscriber sign-ups on its first day in the US. Rollout around the rest of the world coincided with pandemic lockdowns that saw the entertainment company rack up 94,9-million subscribers in a year — a figure they were expected to reach only in 2024.

“The unprecedented success of Disney+ has ignited a debate around just how valuable this additional distribution channel could be and what this means for Disney,” she says.

“Disney’s direct-to-consumer business, which consists of Disney+, Hulu and ESPN+, will be loss-making until 2024,” she says.

“Loss-making entities are often valued using sales and competitor data. Given that Netflix is Disney’s main direct-to-consumer competitor, it is used as a proxy for valuation. As of February 2021, Netflix traded at a price to sales ratio of 10x. If we apply this metric to the Disney direct-to-consumer business, we arrive at the conclusion that at least half of Disney’s current value is ascribed to the growth of the direct-to-consumer distribution channel.”

Despite potential investor hype, which can cause price spikes, Samodien says Disney represents a solid investment case over the long term because of its dominance in the family entertainment ecosystem, which has been bolstered by its well-timed and equally well-executed digital transformation.

“This business has been around for a century and has built a solid entertainment business. It is unclear when the parks and cinemas will reopen and at what capacity, but as these come online alongside the increasingly important streaming platforms, the business will continue to grow and present an attractive investment proposition,” concludes Samodien.

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