Barron's Streetwise - Disney after Coronavirus

Episode Date: April 10, 2020

A temperature check before entering Disney World? In the Barron's Streetwise podcast, Disney executive chairman Bob Iger on how the coronavirus will change theme parks, movies, and streaming. Learn more about your ad choices. Visit megaphone.fm/adchoices

With record levels of dry powder available for investment, find out what's in store for private markets in 2025 and beyond. Listen to Crafting Capital in partnership with UBS at partners.wsj.com slash UBS, Spotify and Apple Podcasts. In order to return to some semblance of normal, people will have to feel comfortable that they're safe. Some of that could come in the form ultimately of a vaccine, but in the absence of that, it could come from more scrutiny, more restrictions. Just as we

now do bag checks for everybody that goes into our parks, it could be that at some point we add a component of that that takes people's temperatures. I'm Jack Howe. Welcome to the Barron Streetwise podcast. The person you just heard is Bob Iger. He's the executive chairman at Walt Disney. And for anyone who's been to Disney World in Florida or Disneyland in California, the idea of visitors having their temperatures checked on the way into parks might be jarring. It's one example among many of how the coronavirus pandemic might change entertainment, including theme parks, movies, and television. We'll hear more from Iger in a moment, and we'll get some predictions from two Wall Street analysts.

Hi, Meta. Hey, Jack. Meta, you've produced podcasts about Disney the company, but have you ever been to a Disney theme park? Nope. I went once as a kid. The family loaded up the wood-paneled station wagon wagon and we drove from New York down to Florida. And we went for like a day and my mom bought me one thing on the way out of the park. And that was one of those spirally lollipops. And I can remember the taste of every groove on that lollipop from the pop-up rumble seat in the back of the station

wagon heading out of Disney World. And I feel like a lot of people have a story like that, but I've also been seven times in the past six years with my kids. Did that just get weird? That got weird. I can explain, and I will in a little while. Let's say a quick word first about the stock market. The S&P 500 index is up more than 20% from the low it hit on March 23. If you look at a measure of valuation, if you look at, for example, the price to earnings ratio, you can make an argument that it's above its February high if you factor in the degree to which earnings might decline this year. It might be well higher. the degree to which earnings might decline this year. It might be well higher.

So the question becomes, has the market climbed too far too fast? But I think that's the wrong way to think about it. There's no reliable way to predict the short-term direction of the stock market. You can't say stocks look pricey today, therefore they're going down tomorrow. What you can do is make educated guesses, forecasts, about the next decade of returns. As an example, I saw this report from Stiefel. It was dated April 5th, and they predict a 5% yearly return for the U.S. stock market between now and 2030. That includes dividends.

So that's about half the historical average that you would get from stocks. And you might wonder, why so low? Are we pessimistic here? But it's really just a matter of the starting valuation. Stiefel writes, it's payback for the strong decade of 2009 to 2019. The fact is, we had a rapid run-up of stock prices during that decade, and valuations did increase. So you would think that returns going forward would be below average, but that's not a reason to get out of stocks. 5% is still likely to beat bonds, especially when we're sitting here with a 10 year treasury yield, well below 1%. So stay invested, stay diversified, but keep return expectations for the next decade low.

Stay diversified, but keep return expectations for the next decade low. Meta, let me give a little background on Disney and explain why I've been so many times so people out there don't think I'm just a huge weirdo. When my daughter was around four, we saw that movie Frozen for the first time. And she was blown away by it. Let it go, let it go, can't hold it back anymore. And she was blown away by it. And a couple weeks later, we went back to the theater, and she said, I want to see Frozen again. I said, oh no, sweetheart, that's not how it works. When we go to the movies, we see a different movie each time. And she looked up at me with a face that kind of said, I'll tell you a thing or two about how movies work, mister.

Long story short, we saw Frozen a few times and figured out that Disney World was a place where I could take her and she could meet these princesses and wear the dresses and do all that kind of stuff. So off to Disney we went again and again. Disney stock has done so well over the years and the company's earnings have grown so much because so many people have followed the same path that I did where they start with the stories

and they end up at the parks or some other part of the business. So it raises the question of how will that look after the pandemic is gone? And how might it look for the broader entertainment industry? I spoke with two analysts about Disney this week. One is bullish on the company and the stock, and the other describes himself as cautious to say the least. Let's start with him. His name is Rich Greenfield. Rich Greenfield. Hi, Rich. It's Jack from Barron's.

Rich is an analyst at LightShed Partners. He covers the media industry. You know, first of all, let me start with this. How would you characterize the situation now across the group that you cover compared with anything else you've seen during your career in terms of the challenge? Look, the entire media universe is under a tremendous amount of pressure. And obviously, theme parks are completely closed with very high levels of overhead. And the after effects in terms of a weakened economy could take years to turn around. So this is pretty bad for the legacy media universe. There's no getting around it. And he points out that 155,000 people on average

go to Disney World every day, more during peak times. Sure, a lot of it's outdoors, but there's lots of packed spaces. And how do you have a you know, how do you go on the Buzz Lightyear ride if you're not standing next to someone? Or, you know, the lines for Disney attractions runs one to two hours. How do you run lines for rides if you're not supposed to be right next to someone? I mean, all of this is very hard to fathom how quickly we go back to that scenario. And I don't know. But, I mean, that's a business that sounds like it could be impacted for quite a long time. I also spoke with Alexia Quadrani at J.P.

Morgan. Hi, Alexia. Hey, how are you? Now, Alexia is bullish on Disney, but she's realistic about the parks. In her analysis, she considers a range of different reopening dates and what they would mean for Disney's financials. For purposes of calculating earnings, she uses June. It happens to be the earliest month for which Disney is accepting reservations. And Alexia doesn't expect things to go back to normal right away. I think it'll be pretty weak after it opens, right? I mean, first off, you have to take the international attendees. I mean, Disney World has, I believe, between 18 and 22% on any given year visitors coming from outside the United States. Now, that tends to be Canada and Latin America more than Europe, but still, it requires in most cases, you know, taking a flight or international travel. Still, it requires, in most cases, taking a flight or international travel. Alexia says consumers could also be left feeling strapped financially because of what's going on with the economy.

And meanwhile, there are still plenty of costs at the parks. You need security, for example. There have been worker furloughs, but not everyone will be furloughed. But there's also regular costs in terms of maintaining the parks, right? I mean, there's animals at Animal Kingdom. There's also regular costs in terms of maintaining the parks, right? I mean, there's animals at Animal Kingdom. There's security required. There's just a certain amount of costs that will always be there, regardless if the park is operating or not. Meta, I had totally forgotten about Animal Kingdom.

There are more than 250 species there. There are gorillas and rhinoceroses. Is rhinoceroses the plural of rhinoceros? Don't ask the non-native speaker, please. There's also, by the way, an animal kingdom lodge where you can see the animals right outside your balcony. I went there once, and when we walked into the room, I got so excited that I lion-kinged my son on top of the bed.

And if you don't know what that means, there's a scene at the beginning of Lion King where they hold up the baby cub, and so I tried to do that with my son. The problem is he was too big by then, and I strained my shoulder. So you have plenty of costs at the park still, and no revenue coming in. But remember I said that Alexia is still bullish. She actually expects Disney to make a profit this year despite what's going on at the parks. I'll come back to that in a moment. Let's hear from someone who knows even more than I do about

Disney if you can believe that. Hi Jack, Zanya. Okay, let me get him. Okay, great. Hey Jack. Hey Bob, how are you? Thanks for making a minute to speak with me. No problem. Bob Iger became chief executive of Disney in 2005. He was supposed to retire in 2018, but then Disney did a deal with Fox where they bought television and movie assets. And as part of that agreement, Iger agreed to stay on through 2021. This year, he became executive chairman and Disney appointed Bob Chapek as CEO. Bob Chapek used to run the parks. So for right now, Chapek still reports to Bob Iger, who's still at Disney until next year. Are you working from home these days, Bob? Are you settling into the rhythm okay? Yes. I mean, it hit me at a particularly odd time because I was transitioning

into a new job. I would have had to get used to a new rhythm regardless. This is even, you know, even more different than I had ever expected. Disney isn't giving any forecasts for theme park attendance, but Bob isn't shy about describing this as the biggest challenge he has faced in his time at Disney. And he wants to set realistic expectations about what the parks will look like after they open. So we've asked ourselves the question, let's prepare for a world where our customers demand that we scrutinize everybody, even if it creates a little bit of hardship. It takes a little bit longer for people to get in. And that's where we get to possibilities about how this scrutiny might work. Just as we now do bag checks for everybody that goes into our parks,

it could be that at some point we add a component of that that takes people's temperatures. Meta, how strange does that sound to you on a scale from one to really, really strange, the idea of having your temperature taken on the way into a park. That sounds really strange. It sounds like science fiction movie strange. I think it would make a lot of people feel weird. But then theme parks didn't always inspect purses and backpacks as people came in the gates. They started doing it because customers wanted to feel safe. And maybe customers want to feel like people around them aren't sick when they go back to theme parks. We don't know for sure that Disney will do this. They're just talking

about it. We don't know if they do it, whether it will last forever or just for now until there's a vaccine found for the virus, but it's a possibility. All right, let's put theme parks aside and talk about television and movies. I want to start with something that the analyst we heard from a moment ago, Rich Greenfield, said about television that really caught my attention. Look, I'll say it on the record. I do not believe there's going to be a fall TV season for the first time ever. There will be reruns on network television for the fall. reruns on network television for the fall. You know, there may be some reality shows that are able to ramp up, but I'd be very surprised if there is network television in September. That, of course, is because production for television and movies has been shut down.

And I started to think about which fall shows I'm going to miss the most. And I realized I don't watch any shows on television anymore. I watch pretty much everything through streaming. A lot of people do that, but many people still watch traditional television. And for now, because that's a more mature business, it's much more profitable than streaming. Okay, so this shift could accelerate the movement of people from regular TV to streaming. In fact, it already seems to be doing that. Disney just announced it hit 50 million subscribers for its Disney Plus streaming service. That's about double where it was in early February.

But we wouldn't expect the profitability of traditional television to be recreated right away on streaming. There are other issues too. For one, sports stadiums are empty right now and Disney owns a network called ESPN, which is one of the most valuable assets on cable. So they're not making the same kind of money they used to right now. And also, across the entire industry, advertising is falling. So TV clearly has plenty of challenges right now. So do movies, of course, because theaters are empty.

Rich Greenfield says it's hard to tell how long the effects of the virus will affect theaters. All production is shut down, and there's no visibility on when production will resume. But even when production resumes, it's not clear when people are going to feel comfortable packing in 200, 300 people at a time into a relatively small indoor movie theater space. Now, people have been predicting the death of movie theaters for a long time,

but you have to believe that under these circumstances, there is going to be a long lasting effect, at least until a vaccine is found. In past conversations I've had with Bob Iger, he's talked about Disney viewing theaters is still very important because he says you get a multiplier effect when you get a multiplier effect when you take a big budget film, you bring it out in the movies, and there's a lot of buzz and a big splash about how much it takes in at the box office. People get excited and they pay attention. I asked Bob about how the company is handling movies that it's already made that were supposed to come out in theaters now that theaters are closed. In some cases, we move things onto

Disney Plus faster than they would have. I think Frozen 2 was one of them, but Onward would be the biggest example where it was in theaters when this happened. We moved to a pay-per-view period for a couple of weeks where people could buy it, own it, via pay-per-view,

and then we ended up putting it on Disney+. It would seem that everything we're talking about so far would add up to a big loss for Disney. But Alexia from J.P. Morgan doesn't think so. We did cut our earnings estimate for fiscal 2020, which is a September year end. We did cut them in half, but we're still suggesting a very nice profit. It's remarkable to think that in a year like this,

a company like Disney still has a shot at being profitable. But consider a few things. In television, a lot of the revenue comes from distribution deals, from the companies that have cable bundles paying the networks for having those networks included in their bundles. Those are usually multi-year deals, so the revenue is still coming in.

There's no way to get around an advertising decline in television, but Alexia says that will fall hardest on local stations who get their advertising from small businesses. Sports are a problem, but keep in mind that sports rights are very expensive, Sports are a problem, but keep in mind that sports rights are very expensive, and now that games aren't being played, it's reasonable to assume that Disney won't be paying full price for those rights that's already negotiated. In movies, not bringing films to theaters also means not paying to market them, and marketing is a big part of the expense of the movie business.

So Alexia sees a chance that the television and movie businesses can still turn healthy profits in Disney's current fiscal year and that that can offset the weakness of the parks. So what should investors do with Disney stock? Well, Rich Greenfield doesn't love it or the rest of the industry. I mean, I think sort of anything in the traditional media universe is tough to own right now. You know, whether we're talking Disney or Viacom or Discovery or AMCX, I mean, this whole universe is really challenged right now. We don't know the length of this. We have no idea how the disruption in production, even when movies come back, we don't know what attendance will be like. Meanwhile, Alexia Quadrani over at J.P. Morgan calls Disney stock her top pick. Now, anytime you're opining on a stock, you have to consider the price. And here, Disney used to trade at over

$150 a share around last Thanksgiving. It's down by about a third. Alexia takes into consideration the assets the company owns and also who's running the company. I have a huge degree of confidence in their ability to not only manage this the best that they can, but endure this crisis as well. I mean, this is a top-notch management team, best in class in the industry. And now you have Bob Chapik, whose background, right, his most recent background has been in the parks, is now CEO. So you talk about having, you know, someone, an expert in the field running the company. This is him.

Let's end our Disney discussion with Bob Iger. He doesn't downplay the seriousness of the situation, but he says he's still optimistic. I don't mean to in any way suggest this too shall pass attitude, because this is obviously the biggest business interruption we've faced. But we know when it ends that we will have things for the public to enjoy and to escape to, maybe in ways that they will appreciate even more than they ever have. Meta, we like to answer listener questions. Do we have anything on whether you should wear a poncho on Splash Mountain or which park to go to if you want to high five Sheriff Woody?

I feel like I can really nail those ones right now. Let me look in our inbox. I'll try and see what I can find. Check the database. Yes, we got a question. It's not about Disney. It's from a guy called Byron. He says he's a millennial.

And here's his question. What would be your recommendation to millennials like myself? With a lot of millennials now becoming parents like myself, we're just, you know, trying not to stay worried about the future. I'm currently in law school and looking at a pretty ugly picture, graduating in about two years. So could you do a little shout out to millennials as far as the job markets is concerned and what we should be doing with our retirement accounts? Thanks for the question, Byron. Every part of it is straightforward except for one part, and that's the job part. You're right. It's a difficult moment

for jobs in America. You mentioned two years from now. I'm hopeful that by then we'll be past this difficulty and back to job growth. When it comes to how to invest, I don't have to tell you that it's important to start early. You know about the power of compounding over time. I don't want you to spend too much time thinking about the perfect asset allocation or what to buy. Put your money in a cheap S&P 500 index fund. In the early years, the amount you're adding to your portfolio will dominate your yearly returns. It's much more important to just get started, get involved, and continue adding money from the start. And I want you to spend most of your time thinking about your most valuable asset. It could be worth millions of dollars. It's the present value of your future earnings. If we were talking about a stock or a bond, we'd say, what's this company going to earn over decades? What kind

of income is this bond going to produce? And what price would we be willing to pay for that stream of income today? In this case, you are the stock or the bond, and that stream of income is your future earnings. And I'm betting it's much more valuable than you realize. So work on protecting that asset and making yourself as valuable of a worker as you can be. Thanks Byron for sending in your question. Everyone keep the questions coming. You can tape them on the phone using your voice memo app and email them to jack.how that's H O U G H at barons.com. Thank you for listening.

Meta Lootsoft is our producer and a big thanks to Rebecca Bisdale and Melissa Haggerty. We couldn't do this without you. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. If you listen on Apple, please leave a review. They make it easier for other people to find the podcast. Follow me on Twitter to find out about stories and new podcast episodes. That's at Jack Howe, H-O-U-G-H. See you next week.

Meta, are we done? I think so, yeah. I'm holding a Chewbacca mask. It happened to be within arm's reach while I was working. You want to hear what it sounds like? Yeah. Did you have that on through this whole podcast, Jack?