Disney SWOT Report


Summary

  • Disney is a leader in content creation and likely to retain that leadership position.
  • Disney’s upcoming streaming service provides a positive growth catalyst.
  • Expanding into new markets as economies develop represents a long-term growth opportunity.

Our SWOT analysis is meant to serve as a baseline for doing research on companies that we might invest in at certain prices. As Warren Buffett has repeated many times, only by getting to know a company’s business, can we start to understand whether or not to invest our hard earned money.

The Walt Disney Company (DIS) operates as a popular entertainment company on a global basis. As of fiscal 2019, Disney is organized under four business segments:

1. Media Networks comprises 37% of Disney’s total revenue. Media Networks handles networks such as ESPN; Disney channels; Freeform branded domestic cable channels; the ABC TV network; TV programming, production, and distribution 50% equity in A&E Networks (A&E, History channel, Lifetime). Disney earns various fees from this segment for: affiliate fees from video programming distributors and TV stations associated with the ABC Network. The company also earns advertising fees from domestic networks and licensing fees for the right to use Disney’s TV programs and productions.  

2. Parks, Experiences, and Products is currently the largest segment by revenue, comprising 41% of Disney’s total revenue. This segment handles Disney’s theme parks and resorts. This includes theme parks in Florida, California, Hawaii, Paris, and 47% & 43% interests in Disney resorts in Hong Kong and Shanghai respectively. The segment also includes the Disney Cruise Line, Disney Vacation Club, and consumer products (sale of branded merchandise and licensing of characters, trade names, etc). 

3. Studio Entertainment comprises 14% of total revenue. This segment handles Disney’s movie production and the production and licensing of live entertainment events (stage plays).

4. Direct-to-Consumer & International comprises the remaining portion of revenue, which is currently in the single-digit percentages. The segment includes streaming services such as ESPN+ and HULU. This segment will also include Disney’s new streaming service, Disney+, which has a planned launch for late 2019. The launch of Disney+ has the potential to add to this segment’s overall revenue, giving the company a more diverse revenue balance across businesses over time. 

Strengths

Disney remains a leader in content creation with many family-oriented movies that become the themes of their parks both of which tend to last the test of time, giving the company a strong moat. Here is an A to Z list of Disney’s content

  • Disney has strong brand recognition with popular themes and characters that are typically safe for family viewing. This provides total family experiences where parents and their children consume the experiences. The company has been able to increase theme park prices as a result of strong demand.
  • Disney is diverse across multiple businesses. The company is not a one-trick pony. The diversity allows Disney to obtain revenue from a variety of sources.
  • The company has the ability to expand globally. Although there have been struggles in Paris, Disney has been able to expand into new regions around the globe. 
  • Disney has strong cash flow. For the past twelve months, Disney had operating cash flow of $13.5 billion and free cash flow of $7.6 billion. This allows the company to spend money on expansion, pay down debt, to pay dividends and for share repurchases (when it strategically makes sense). 
  • There are 1.97x more total assets than total liabilities on the balance sheet. This puts the company in a good position to handle long-term obligations. 

Weaknesses

Disney has some weaknesses that they may have to live with, but there are others that can be improved upon.

  • The capital intensive nature of Disney’s businesses gives the company high operating costs. It can take a lot of capital to produce movies, run theme parks, etc. The high operating costs can create challenges for growing earnings. 
  • There is room for improving business innovation. For example, Disney was late to the table with their Disney+ streaming service. They should have launched this service a decade ago when witnessing the success of Netflix (NFLX).  
  • The company experienced loss of ESPN subscribers as a result of cable customers cancelling their service in favor of streaming services. 
  • Disneyland Paris has been historically unprofitable and weak in attendance as compared to the U.S. locations. However, there has been some hope as the Paris revenue increased and the location reached profitability in 2018. So, we’ll have to see if Disney can continue to maintain better performance in Europe. 

Opportunities

Disney has a well-established popular brand, which can be leveraged for future growth and business diversity. 

  • The company has a good opportunity to leverage their content with the Disney+ streaming service. The large library of content with many classic titles has the potential to attract a strong subscriber base. This effort can significantly increase the revenue of the direct-to-consumer segment, further diversifying Disney’s revenue.
  • Disney can grow into new markets. Developing economies will be new potential growth regions. As developing economies become more advanced, a need for leisure time at theme parks could be a desirable activity similar to the way it is in existing locations.  
  • There is an opportunity to use new technology to enhance guest experiences. Disney already implemented a mobile food ordering system where guests can order food in advance (even before they arrive at the park) through a mobile app to avoid long wait times. Disney also implemented an advanced wristband that acts as a passport for park services, stores payment card information, and can be used to located children if they get lost. 
  • Disney can find more ways of using technology to improve guest experiences. The internet of things [IoT], virtual reality, and artificial intelligence are examples of technology that could be used to enhance experiences for guests. These can be used to give guests a more advanced form of entertainment as well as improving customer service.

Threats

There are a few external threats that could create challenges for Disney.

  • There is plenty of competition for content in streaming, movies, and theme parks. NetflixAmazon (AMZN), YouTube (GOOG), and offerings from others can cut into Disney’s market share for streaming. 
  • Competition for TV and movie production includes: AT&T (T), Lionsgate (LGF.A), CBS (CBS), Comcast (CMCSA), AMC Entertainment (AMC), and others. These competitors could take viewing time away from Disney. 
  • Market share could be taken away from theme park competitors: Universal StudiosSix Flags (SIX), and Cedar Fair (FUN) as well as local small parks such as amusement parks, water parks, and similar attractions. 
  • Content piracy remains a threat to Disney’s profitability. Savvy criminals could illegally stream Disney’s content and eat into the company’s market share. 
  • Changing consumer trends or a slowdown in economic growth could cause consumers to seek other entertainment alternatives, especially as a replacement for the expensive theme parks. 

Long-Term Business Outlook for Disney

Overall, Disney’s strong content and brand recognition is the differentiator that gives the company a competitive advantage. This competitive advantage can keep the competition at bay. It can be leveraged to allow the company to grow over the long-term in new and existing markets.

Disney is poised to grow revenue at a strong pace over the next few years. The company’s focus on families and children-friendly content helps to turn positive experiences into revenue. The upcoming Disney+ streaming service has the potential to drive growth for the company and better balance their segment revenue. Other innovations can help improve customer service and experiences over time. 

Disclosure: I am/we are long DIS.

Business relationship disclosure: This article was written by David Zanoni with guidance from Kirk Spano.

Additional disclosure: The article is for informational purposes only (not a solicitation to buy or sell stocks). David is not a registered investment adviser. Kirk Spano is an RIA. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.