Say what you will about the host of CNBC’s Mad Money Jim Cramer, but he’s not afraid to speak his mind. Recently, Cramer suggested that Disney (NYSE:DIS) CEO Bob Iger “has a great long-term situation brewing” that ought to be very good for Disney stock.
Is he right?
Here are two reasons he’s right and two reasons he’s wrong. You can decide which arguments hold the most weight.
The Outlook of Disney Stock Is Positive: Disney+
It’s hard to imagine any new entertainment initiative getting as much attention as next month’s launch of the Disney+ streaming service.
I did a quick search for “Disney+” on InvestorPlace’s website and came up with 3,547 matches, including several in the past week alone. Investors who are not familiar with Disney+ have no business owning DIS stock. Period.
For many, Disney+ will be Bob Iger’s crowning glory, the move that cements the executive’s place in the CEO Hall of Fame.
InvestorPlace columnist Tom Taulli recently highlighted just how important Disney+ is to the company’s future, suggesting that it could deliver as many as 25 million U.S. subscribers and 50 million international subscribers by 2024. And that, Taulli believes, could be conservative.
So let’s assume Disney+ reaches those numbers. Let’s also assume that about 50% of the subscribers in the U.S. go for the bundle — $12.99 per month for Disney+, Hulu, and ESPN+. And let’s assume the remaining 50% go for the $6.99 per month plan and overseas, 100% go for a plan that costs 25% more at $8.99.
By my calculation, Disney would generate $3 billion of annual revenue in the U.S. from Disney+ and $5.4 billion overseas, for average annual revenue per user of $112.
In fiscal 2018, Netflix’s (NASDAQ:NFLX) average annual revenue per user was $123 .
If Disney can get anywhere near those numbers, Disney+ would have to be considered a significant success for the company.
The Outlook of Disney Stock Is Positive: The Parks, Experiences and Products Unit Is Doing Well
The unsung hero of Disney, the Parks, Experiences and Products unit continues to deliver solid operating profits despite facing a very competitive environment.
In Q3, this segment generated an operating profit of $1.7 billion on $6.6 billion of revenue. On the top line, its sales grew by 7% while on the bottom line, its operating profits increased by 4%. Those results were healthy, if not spectacular.
What stands out for me is that Parks’ attendance fell 3% in the U.S. during the quarter and 7% overseas. Yet its per capita guest spending increased by 10% in the U.S. and 17% overseas.
That’s what I call pricing power.
On the hotel side, its occupancy was 87% during the quarter, one percentage point higher than a year earlier, thanks to a strong showing from its domestic hotels. Overall, guests spent $362 per room per night, 4% higher than in the same period a year earlier.
Again, this speaks to the power of the Disney brand.
The sales of its retail stores rose 4.3% year-over-year in Q3, and the stores help keep the brand in front of consumers.
Lastly, this segment generated the lion’s share of the company’s high-margin merchandise licensing revenue. In Q3, it came in at $631 million, 13% higher than last year.
If Disney doesn’t lose its founder’s flair for the creative, Parks, Experiences and Products will remain its most consistent moneymaker.
The Outlook of Disney Stock Is Negative: DIS Has a Lot of Debt
Low interest rates have managed to ease fears about corporate debt. However, that doesn’t mean the owners of Disney should become complacent.
“Corporate leverage is worsening in 2019 as debt rises faster than earnings for non-financial companies,” said S&P Global Ratings Credit Analyst Terry Chan recently. “Very low global corporate profit growth (1%) forewarns possible earnings and economic recessions,” Chan added.
Disney finished Q3 with $51.5 billion of net debt. That’s 2.5 times its trailing 12-month EBITDA of $20.6 billion. However, excluding its cash, Disney’s long-term debt is almost five times its net income.
As a result of the added debt it added as a result of its acquisition of the entertainment assets of 21st Century Fox, Disney’s interest expense in the third quarter was $411 million, 2.9 times higher than a year earlier. On an annualized basis, that’s almost $2 billion.
A recession wouldn’t be kind to Disney’s bottom line. However, that’s true of many large companies.
The Outlook of Disney Stock Is Negative: The Other Streamers
Many are assuming that Disney is going to be the belle of the streaming ball, capturing a big slice of the streaming market while barely breaking a sweat.
But consider that when Apple (NASDAQ:AAPL), AT&T (NYSE:T), and Comcast (NASDAQ:CMCSA) finally launch all of their respective streaming services, there will be a trio of companies competing with Disney. Those three competitors have a combined market cap of $1.5 trillion, seven times Mickey Mouse’s.
That’s not an easy battle to win. And Netflix isn’t likely to take kindly to Disney’s full-court press, either. Money is going to be spent by the boatload.
The owners of DIS stock, used to a consistent dividend, are going to be in for the shock of their lives if Disney+ doesn’t go as planned. I’m not saying it won’t, but Iger can’t afford to drop the ball on this or his legacy will be mud.
The Bottom Line on Disney Stock
I don’t think Disney+ will be a loser. Its brand is too strong.
Therefore, I would say that Cramer is right about the outlook of Disney stock being positive.
The only caveat: If the inevitable recession comes next year or the year after that and DIS hasn’t paid down a good chunk of the debt it borrowed to buy 21st Century Fox, DIS stock won’t be doing very well.
Come November 1, the stakes will go way up for Disney stock.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
