Rebuilding the House of Mouse? – Weekly Stocktake with Danyaal

Weekly Stocktake with Danyaal

11 February 2023

Key Indicators

Source: Iress

Rebuilding the House of Mouse?

Disney has been expanding its IP catalogue through strategic acquisitions over the years. They have acquired companies such as Pixar, Marvel, and Lucasfilm. These acquisitions have allowed Disney to tap into new markets and reach a wider audience; and helped Disney to solidify its position as one of the leading players in the family-entertainment industry.

But what do the numbers say, and what else has the House of Mouse acquired and focused on?

Disney released its Q1 2023 results last week. Revenues for the quarter increased by 8% to $23.5 billion compared to the same quarter the previous year, resulting in a net income of

$1.28 billion and a profit margin of 5.4%. As of Friday, the market valued the company at $197 billion with a price to earnings ratio of 59. In the earnings call, Disney announced plans to reduce operational costs by $5.5 billion by the end of 2024 financial year. The company will also be reorganized into three core business units:

• Disney Entertainment;
• ESPN
• Disney Parks, Experiences and Products.

Each unit will have increased creative and operational control.

Acquisitions at the right price, that deliver appropriate returns is good for both clients and shareholders. The opposite however can be very painful.

Disney acquired the majority of 21st Century Fox’s assets for $71.3 billion in 2019. The amount they paid was over four times what they paid for Lucasfilm, Pixar, and Marvel combined. Revenue from content providers primarily comes from new content. New content attracts new subscribers and puts people in cinema seats. The question is how effectively can Disney generate new content off their 21st Century Fox assets, given how much they’ve paid for it.

Disney faces another challenge.

They own two-thirds of the streaming service Hulu, with the remaining third owned by Comcast. Under their agreement, Comcast can require Disney to buy out their remaining stake for $27.5 billion by early 2024. This is not a great situation to be in when you’re trying to be focused on cost-cutting. Firms that rely heavily on acquisitions for growth often face challenges, including a tendency to pursue larger and riskier deals at increasingly high costs, at the expense of shareholders.

Disney is not held by the Lunar BCI Worldwide Flexible Fund.