The Walt Disney Co. (NYSE: DIS) has a reputation as money-making machine but is that true? Is the entertainment colossus making money, or is it doomed in a dramatically changing entertainment business?
Many people will be wondering this after ESPN launched a massive round of layoffs. Several Sportscenter anchors, and a number of celebrity commentators including baseball stars Dallas Braden and Doug Glanville; and NFL alumni Trent Diller and Danny Kannell, The Motley Fool reported. What’s truly scary is that the ESPN layoffs are just the tip of the iceberg.
The Incredibly Shrinking Ratings
Sales in Disney’s cable division fell to $4.06 billion in first quarter 2017, Bloomberg Markets reported. Profits in the cable division fell by 3%.
Ratings are falling even faster than that; ESPN has been losing ratings for three years straight dropping to 90 million in 2016 which is still pretty impressive. ESPN’s viewership was close to 100 million as recently as 2013.
Although profits at ABC, Disney’s U.S. broadcast division rose by 14% because of fees from pay TV providers, Bloomberg reported. That more than offset the losses from falling ad sales at ABC which dropped to $1 billion in 2016.
Film profits at Disney grew to $656 million largely because of the popularity of a live action Beauty and the Beast movie. So it looks like Disney’s money machine is still humming even though ESPN is slowly dying.
How much Money is Disney Making?
Naturally value investors will wonder if all those video downloads are generating any float for Disney. They’ll also want to know if Disney is translating all those streaming videos into cash.
The answer to both questions is yes, theme parks and video entertainment are still very profitable businesses; Disney’s first quarter 2017 earnings report indicates. Some of the highlights of the report include:
- Revenues that rose slightly from $55.17 billion in December 2016, to $55.54 billion three months later. Revenues are growing slowly they were $54.83 billion in March 2016.
- The net income is growing again after a slight drop late last year. Disney revenues rose to a high of $9.391 billion in September 2016; that fell to $8.99 billion in December 2016, but rose to $9.235 billion in March. This might that streaming video revenue is beginning to make up for lost advertising income.
- A profit margin of 17.91%.
- A free cash flow of $2.555 billion. This was marked a more than 10 fold increase from December 2016 when the free cash flow fell to $220 million. That shows us that Disney’s theme parks and movies are still generating a lot of float.
- Assets of $91.81 billion, this was a slight increase over December 2016 when assets were $91.58 billion.
- Cash and Short-term investments of $3.808 billion. This was a slight increase over December 2016 when Disney had $3.736 billion in the bank, but it was a lot lower than March 2016 when Disney had savings of $5.015 billion.
- $11.93 billion in cash from operations. This number was down slightly from $12.02 billion in December 2016, and $12.12 billion in March 2016.
It looks as if Disney is making less cash and float. Major changes to its business model are needed now if it wants to keep the money machine ticking. Fortunately Bob Iger seems dedicated to making those changes.
Is Disney a Good Investment?
So is Disney a good investment? I would say not at the moment because it is overvalued at the $106.25 shares were trading at on May 17, 2017. A more realistic price for this stock would be around $80 a share.
Despite that there was a lot to like at Disney including a 78¢ dividend paid on December 8, 2016, that was a seven increase from the 71¢ dividend paid on July 7. Investors took home a 21.13% return on equity with Disney on March 31, 2017, which was good.
My advice is to hold Disney shares if you have them; because I think this company is a long-term moneymaker, but hold off on buying. I expect Disney’s share value to fall soon, but the company to remain a moneymaker.
All of its assets; especially the movie and TV libraries and Marvel, will be worth a fortune in the digital video market in years ahead. That will make Disney a value investment for the foreseeable future.