MorningWord 2/8/17: Disney (DIS) – Iger Counter

by Dan February 8, 2017 9:54 am • FREE ACCESS

Last night Disney (DIS) reported mixed fiscal Q1 results. The shares were down initially on the news as the release showed mild sales misses in every product category, but now up 1% as I write. Per their release:

1Q rev. $14.8b, est. $15.3b (range $14.8b-$15.6b)
1Q media networks rev. $6.23b, est. $6.38b
1Q parks and resorts rev. $4.56b, est. $4.69b
1Q studio entertainment rev. $2.52b, est. $2.55b
1Q consumer/interactive rev. $1.48b, est. $1.70b
Shanghai park attendance to top 10m in first year, management says on earnings call
Domestic park attendance down 5%, ESPN ad revenue down 7% in 1Q, kids channel viewing down; Monday night football, Sportscenter ratings down

But then the stock caught a bid on the following headline and is higher by about 2% from yesterday’s close:


Last year he had stated that he was not likely to stay beyond his current contract (that expires in 2018). As you can see from the above breakdown of product sales, media networks is the largest at 42% of total sales, and mouse house followers know that ESPN is a massive driver of that business, and the unit’s un-bundling/cord cutting challenges weighed on results, per WSJ:

ESPN continued to struggle with long-running problems. The sports giant lost subscribers, and average viewership and advertising rates were both down, due in part to fewer college football playoff games in 2016. Programming costs grew, meanwhile, because of an expensive new deal with the National Basketball Association.

ESPN was entirely to blame for an 11% drop in the company’s cable operating income to $864 million. Other cable networks were flat.

In response to questions about ESPN, Mr. Iger spoke extensively about work the network is doing with the streaming company BAMTech, in which Disney invested $1 billion for a 33% stake, to create a direct-to-consumer sports service. It is targeted to launch by the end of 2017, the CEO said, and will include a variety of content not on the linear network, including baseball.

If Iger does stay beyond 2018, he is doing so to navigate their media networks, specifically ESPN into the streaming/ un-bundled from cable packages new world-order. That new world order has penetrated their protective moat as the internet disrupted the music and news industries before it.  Iger is staying to fix ESPN, and if he’s able to do so, that would put him in the running to be as one of the very best public CEOs of the digital generation, up their with Jobs & Gates.

Iger single handily orchestrated the acquisition of three of the dominant movie studios over the last 11 years, starting with the $7.4 billion purchase of Pixar in 2006, the $4 billion purchase of Marvel in 2009, and his $4 billion buy of LucasFilms in 2012. If it were not for those deals, and the contribution of the studio and entertainment biz, we would be discussing DIS as a wilting empire.

One last thing. My pal & Fast Money co-panelist Guy Adami made a fairly interesting prediction on last night’s show. He said that with a less than stellar succession plan in place to replace Iger that Reed Hastings, the founder and CEO of Netflix, could be the next CEO of DIS. Guy’s prediction is based on a long held belief that DIS will acquire NFLX because it’s the premier digital content delivery platform, but also because it has the potential to be an outlet for DIS’s live TV content like ESPN and ABC News, an area that NFLX has yet to tackle. This is probably the only way an $80 billion price for NFLX would make any sense. NFLX is a barely profitable company, and even with that sort of price to sales multiple, 10x trailing assigning a 30% premium to NFLX’s current $61 billion market capitalization, I suspect the only way Hastings would sell would be to helm the combined entity.

Back in August in this space, I made a similar point to Guy, (less the DIS/Iger speculation – read her -> Stranger Things), when NFLX was much lower, below $100:

over the last week I watched Netflix’s (NFLX) original sci-fi series Stranger Things, which was awesome. After it ended I thought to myself, if this company were use the currency given to them by their own little stock bubble to buy other studios, and create a seasonal schedule like Time Warner’s (TWX) HBO, why couldn’t NFLX be one of the largest media properties in the world given their installed base and first mover advantage?

But then I recalled those pesky fundamentals, like user growth that has decelerated massively, the company in Q2 adding the smallest net subscriber gains since the launch of their streaming service 5 years ago. Also, that Amazon has more U.S. streaming subs than NFLX, that the company has a market cap of $41 billion, or 66% of TWX, a company expected to have 3x NFLX’s $8.7 billion in 2016 sales.

But maybe none of that matters in the environment we are in? Microsoft just paid $27 billion for LinkedIn (LNKD), a money losing (GAAP) company that had $3 billion in sales last year.  Why couldn’t we see a $55 billion deal for NFLX? Trust me, if you’ve been doing this long enough, you’ve seen Stranger Things (AOL/TWX).