The Death Spiral. When companies enter it, I always go back to the legendary quote from Supreme Court Justice Potter Stewart (he was offering an opinion in a case regarding hard-core pornography): ''I know it when I see it."
I onboarded a new account this week, and one of the first things we did was dump Disney (DIS) . The client had some other long-term winners, and I let those go, but as far as DIS, I couldn't wait to dump that one and put it into one of my beloved preferreds, in this case we chose (PACWP) , PacWest's 7.75% preferreds, which are trading at over a 35% discount to par.
But why pick on Disney? As I read this morning's screaming headline on CNBC.com, "Wells Fargo says Disney shares to rally 60% with Iger's possible divestitures adding $10 a share," I chuckled as I saw DIS shares falling yet again today. In fairness, I didn't read the Wells Fargo report on DIS, although I have accounts with Wells and certainly could access that report, if I wanted to. But I don't want to. As a former sell-side analyst, I know all-too-well that many of them never "know it when they see it" until it is far, far too late.
The problem is that the Mouse House has an Elephant in the Room. We all know it. I am sure the Wells Fargo team does too, but it is just so obvious when looking at recent box office results. The phrase is a cute one, but also valuable for investors: Go Woke Go Broke.
I don't want to deliver a discourse on Disney's battle with Florida Governor Ron DeSantis over the (formerly) specially-legislated status of the land containing Disney World. I avoid politics whenever possible. But as a stock analyst, I never avoid articles like this one in the WSJ about a marked decline in attendance thus far in summer 2023 at Walt Disney World and Disneyland.
The economy is not great and things are still much more expensive than they were before the pandemic. Used cars have been a big downdraft in recent CPI reports, which has sparked Wall Street's "inflation is over" narrative, but airfares, the CPI constituent most relevant to Disney's theme parks, have actually been rising significantly in recent months.
I get all those things. But are people not taking summer vacations - if they weren't, airfares would be declining, not rising - or are they just choosing different destinations?
I believe it is the latter.
The answer is even more clear when it comes to Disney's filmed entertainment business. According to boxofficemojo.com, Disney only has three of the top 10 grossing films thus far in 2023, By all accounts Indiana Jones and the Dial of Destiny (I haven't seen it, although Raiders of the Lost Ark will always be one of my favorite films) has been a major box office flop.
Yet, Sound of Freedom, produced by 20th Century Fox in 2018 and then shelved by DIS after it bought its rival, has had an unprecedented box office run for an indie film. I have not seen that film, either, and I won't enter a discussion about its merits. That said, I am in South America now on a business trip for ExCap (Sound of Freedom was mostly filmed in Cartagena, Colombia) and I know that human trafficking is a major concern on this continent. That's all I will say. I will avoid third rails.
But how on earth did Disney leave a movie that will end up grossing $100 million domestically (it has already grossed $53.9mm heading into this weekend, according to boxofficemojo.com) "in the can " for years, before finally sloughing it off on movie upstart Angel Studios?
Simply put: Disney's management decisions have turned people off. The brand is damaged. I know it when I see it, and thus I dumped DIS, which hasn't declared a common dividend since 4Q19, as soon as I saw it in this new client's account.
Will Bob Iger reverse that? By going on CNBC and intimating that ESPN is for sale, as Iger did earlier this week? Not likely. By "divesting" assets that would "add $10/share" (which would only add 11% to DIS value), according to the report this morning from WFC's analyst? No. If Disney were to become a seller, as Iger hinted, then Disney would own less (or control less, if a joint venture were the preferred structure for dumping ESPN) content.
And that content, seemingly, is the one valuable thing that Disney has. No one else owns Mickey Mouse, Donald Duck, Princess Leia or Buzz Lightyear. Or even Indiana Jones. But Disney, as I mentioned in my prior Real Money column on the name, has found an extraordinarily effective way of offsetting the goodwill created by these characters.
Disney's brand is decaying. I know it when I see it. So does anyone with access to stock quotes. I just don't see Bob Iger reversing the Death Spiral. Continue to avoid DIS.
