It's no secret that the Walt Disney Company (DIS) has struggled for quite some time now. Gargantuan costs related to the streaming service, where sales growth has slowed significantly. The Cable networks, ESPN primarily, still provide cash flow and contribute toward profitability, but this is a losing battle. This business has been in retreat for years.
The firm has battled with Florida Governor turned presidential candidate Ron DeSantis some would say unnecessarily. That might be said about either side, regardless of perspective. My perspective is about making money. I am strictly a mercenary when it comes to investing or trading. I don't like to lose, and Disney is a name that I have mistakenly gotten behind all too often.
Much of the firm's more visible problems became an issue under former CEO Bob Chapek, who I will not pretend was meant to ever hold that job. The firm brought back the popular Bob Iger to replace Chapek, whom he had replaced. While Iger is well-known, and a far more formidable opponent for Gov. DeSantis than Chapek ever could have been, his corporate rap sheet is not super clean. The firm's purchase of the entertainment assets of Fox Corp (FOXA) clearly remains one of the firm's most costly blunders, and that deal was all Iger.
What Else Could Go Wrong?
At least the parks are doing well. Right?... right??? The best idea that Iger has come up with since returning has been to reduce costs through payroll reduction. The Wall Street Journal ran a piece on Monday titled "Disney World Hasn't Felt This Empty in Years." According to the piece, the recent Independence Day weekend was among the slowest in nearly a decade.
According to analysis done by Touring Plans, the average posted wait time in the Magic Kingdom in Orlando, which had a special fireworks display that day, was 27 minutes, down from 31 minutes for the year ago comp, and down from 47 minutes in 2019 (pre-pandemic).
Does underwhelming growth at streaming (direct to consumer) and contraction in the linear (cable) networks, result in disappointment in the ability to drive advertising dollars? The answer is almost certainly, yes. UBS analysts stated this week that they see a possible 22% decline in advertising for the quarter to be reported on August 8th. Don't expect the studio business to ride to the rescue. The parks will show growth from 2022, but decelerating growth.
On Tuesday, news broke that Disney is reportedly exploring strategic options for its Star India business. This business was one of the prizes "won" in the Fox deal that cost Disney $71.3B. It was to be a key in Disney's global strategy. Then, Disney was outbid for the rights to stream the very popular Indian Premier (cricket) League, which was key to Star India's line-up.
The Disney+ Hotstar service in India is expected to lose 8M to 10M subscribers for the quarter and perhaps 15M subs for the full year. Additionally, the Hotstar service has produced less and less revenue per user. Hotstar ARPU printed at $0.59 for the April quarter, down from $1.20 in less than a year.
Does Disney sell Star India for a loss? Do they take on a partner of some kind in some way that at least slows the bleeding? Then What? If the studios and parks can't produce as they have in the past? Is the firm forced by circumstance to either spin-off, sell, or do something creative with ESPN? Though in decline, it's still the gem in this bunch.
For the firm's fiscal third quarter to be reported in early August, consensus view is for adjusted EPS of $1.04 (GAAP EPS of around $0.53) and revenue generation of about $22.6B. The adjusted earnings print would be down from the year ago comp of $1.09, while the revenue number would be good enough for year over year growth of 5%.
More important than the numbers reported will be how Bob Iger tackles and the above questions and postures the firm moving forward. Iger will have to sound confident, which he is certainly capable of, but he is also going to sound like he has a specific plan not just in his mind, but ready for implementation. Sell the entire firm? One never knows.
What's this? The downward trend has been in place since early 2021. Since mid-2022, this chart has turned into a descending triangle, which is bearish. Bearish? Still? It does not have to be. Relative Strength has been and remains neutral. The daily MACD (Moving Average Convergence Divergence) has not done any summersaults since early 2023. Am I concerned? Not right now. I am long at $91.32. so my losses are easily manageable here.
The fact is that the $84 level is a line in the sand. The stock will rebound if help is announced regarding the Hotstar business. The stock will rebound if anything is announced that generates increased revenue through the ESPN business. The stock will rebound if someone buys the firm.
On that... Let's look at the balance sheet. Disney ended the April quarter with a cash position of $10.399B and inventories of $1.848B. That left current assets at $28.263B. Current liabilities added up to $28.056B at that time, which included debt labeled as current of $3.452B. That placed the firm's current ratio just barely over the important 1.0 level. Omitting inventories, the firm's quick ratio stood at 0.94, which is not really so hot.
However... $6.013B worth of those current liabilities were of the deferred revenue variety meaning that they were not financial liabilities but liabilities of goods, services or labor owed. Hence, the firm's "current" situation is stronger than it looks at first glance.
Total assets amounted to $204.858B. This included goodwill and other intangibles of $87.793B. At 42.9% of total assets. That's a bit high for me, but this is Disney, and the intangible assets are obviously more valuable here than they would be elsewhere. Total liabilities less equity comes to $103.302B. This includes $41.614B worth of long-term debt. Is the balance sheet solid enough for a buyer? Depends on the buyer.
I'll add from $90 down to $85. That said, the pivot for a bearish break-down is $84. I see that level crack? I'll cut my losses and do something else with the cash. $84 has to hold.