This is a truly exceptional business with multiple strengths which should serve it well for decades to come
Thursday 21 Jan 2021 Author: Tom Sieber

Not too many stocks through the course of this pandemic will be winners in both lockdown and reopening scenarios but Walt Disney is one.

Its relatively new streaming service Disney+ has been a favourite with families stuck at home needing to keep kids entertained, and its theme parks and resorts should benefit from pent-up demand as vaccines help unlock society.

That’s the short to medium-term argument for buying Disney shares – the long-term case is even more compelling.

WHAT’S IN THE HOUSE OF MOUSE?

First let’s take some time to consider what exactly Disney is. It is hard to believe there is anybody bar perhaps some remote tribes in the Amazon who have never heard of Disney or at least some of its films.

For many of us watching Disney classics, and moments within them like the death of Bambi’s mother or Aladdin’s flying carpet ride, will have been a formative part of our childhood.

However, while still probably best known for its animations Disney is now a global entertainment business encompassing Toy Story creator Pixar as well as the Star Wars and Marvel titles.

To put that into context, these four cinematic universes together comprise 27 out of the 50 top grossing films of all time according to data from Box Office Mojo.

Disney also owns the ESPN sports channel, well-established video-on-demand service Hulu as well as the ABC broadcast network in the US and 20th Century Studios (formerly Twentieth Century Fox and acquired in 2019).

BEATING SUBSCRIBER TARGETS

Just before Christmas the company announced it was way ahead of the curve with global subscriber targets for its streaming services as it engages more directly with consumers.

At the outset Disney was targeting 60 million to 90 million global subscribers for Disney+ by the end of its September 2024 financial year. As of 2 December 2020, it had already hit 87 million and those 2024 targets have now been increased to between 230 million and 260 million.

This has been achieved largely based on a wealth of historic content attracting viewers, and this existing material alone is helping to underpin an increase in the cost of a monthly Disney+ subscription from February 2021 onwards. In the US from $6.99 to $7.99 and in the UK from £5.99 to £7.99.

However, at the same time as revealing the positive subscriber news the company unveiled plans for 105 new films and TV series, sending shivers down the spine of competitors Netflix and Amazon as they include many new titles from successful franchises.

Around 80% will appear on Disney+ with some film titles appearing on the streaming service exclusively rather than getting a release in cinemas.

The planned projects include a prequel to the Lion King, a new version of the Little Mermaid in addition to a wave of new Marvel titles and a new entry in the Indiana Jones series.

The Star+ platform, set to be included with Disney+ subscriptions in Europe, will also add more shows pitched towards an adult audience.

REASONABLE VALUATION

Against this helpful backdrop and despite a strong run from the lows seen in March 2020, when we said to buy in an in-depth look at the business, the shares trade on a reasonably undemanding September 2023 (post-crisis and the peak of content investment) price-to-earnings ratio of 28.3 based on consensus forecasts. As a point of comparison Netflix shares trade on more than 40 times 2022 earnings per share.

The sheer breadth, depth and quality of Disney’s content is only set to grow in the coming years, and that puts it at a significant advantage in what is admittedly a competitive streaming space.

The impact of the Covid-19 pandemic has fundamentally reshaped the group – with streaming overtaking the parks division to become the dominant contributor to group revenue.

As Steve Wreford, portfolio manager at Lazard Global Thematic (B464177), observes: ‘Sandbox tests means you set aside part of your business to try out something and if it doesn’t work, it doesn’t affect the rest of your business.

‘Many consumer companies were forced into a very large sandbox in 2020 and none more so than Disney. Instead of releasing a lot of films at the cinema, they had to think about changing their business and releasing films like Mulan direct to TV on their own channel. We like companies who learned a lot about themselves in 2020.’

MAKING CONNECTIONS WITH CONSUMERS

Despite the shift in the hierarchy within the group, it is important not to underestimate the importance of the parks. These resorts and the various entertainment divisions enjoy a symbiotic and mutually beneficial relationship, reinforcing people’s attachment to Disney’s creations.

We have quoted media commentator Matthew Ball’s words on this effect before, but they bear repeating. ‘There is nothing that can compare to the impact of a child being hugged by her heroes,’ he says. ‘The ability to enjoy your favourite intellectual property as “you” is unique and lasts a lifetime.’

Disney simply resonates on a much deeper level than other entertainment providers for many of us. And this makes it a fantastic stock to hold, if not for a lifetime then definitely for the long run.

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