Let me explain. On January 4-6 our extended family took a trip to Disneyland. There were 9 of us in total (me, my wife, our 2 kids, my mother-in-law, sister-in-law and brother-in-law, my wife’s cousin and my wife’s cousin’s boyfriend). We spent 3 days bouncing between Disneyland and California Adventure.
We planned this trip in part because my daughter was about to turn 3 and, until she did, admission was free for her. As we were buying our 3-day park hopper passes ($299 per adult) we realized that for just $30 more we could get Southern California Resident passes, which allow us to get into the park during the weekday (weekends and June 15 – July 31 are blacked out). We realized that the chances of making a 2 hour drive at least once more in 2017 were pretty high, so we upgraded to the annual pass.
On our first day (Wednesday, January 4th) the park reached capacity by 10 am. While Disneyland’s capacity hasn’t been publicly released, it’s generally accepted that max capacity is approximately 80,000 people. Thursday, January 5th didn’t hit capacity but must have been pretty close, and on Friday, January 6th Disneyland once again hit capacity.
Attendance and ticket prices
That got me thinking – what does the annual attendance look like at Disneyland? Well, the short answer is that attendance is high and growing. According to Statista, here are the yearly total attendance figures for Disneyland from 2009 to 2015 (2016 figures aren’t available yet):
- 2009 – 15.9M
- 2010 – 15.98M
- 2011 – 16.14M
- 2012 – 15.96M
- 2013 – 16.2M
- 2014 – 16.77M
- 2015 – 18.28
Not too shabby. It was a bit of a bumpy ride, but attendance is up 15% over 6 years. But here’s what makes that even more remarkable – the cost of the tickets have also been going up during that time.
According to Wikipedia, the pricing during those years was:
- 2009 – $72
- 2010 – $76
- 2011 – $80
- 2012 – $87
- 2013 – $92
- 2014 – $96
- 2015 – $99
Disney has increased prices by 37.5% in 6 years and attendance still increased by 15%!
What do those numbers tell us? They tell us that Disney is a world-class business. It’s a basic tenet of economics that when the price of something goes up demand goes down and vice versa. Somehow, this rule doesn’t seem to apply to Disneyland. The demand for Disneyland is completely inelastic.
And what happens when you can increase the price of something and sell more of it as a result? You make money hand over fist.
Let’s do a simple calculation. Assuming every attendee paid the 1-day price, how much would have Disneyland made in 2009 and 2015 solely from ticket sales?
- 2009 = $72/person * 15.9M people = $1,144,800,00
- 2015 = $99/person * 18.28M people = $1,809,720,000
That’s a 58.1% increase in 6 years.
But that’s not all. Again, Disneyland doesn’t release official figures, but insiders say that Disneyland sells 1M annual passes per year. The cheapest annual pass is $329. That means Disney is making a MINIMUM of $329M/year just from annual passes at Disneyland.
And here’s the crazy part – Disney actually doesn’t make much money on ticket sales. The cost to run the park is high – salaries, electricity, maintenance, etc. Just as a point of reference, Disneyland has 23,000 employees plus another 3,500 contractors. That’s a lot of fixed costs to cover.
So where do the profit come from? Merchandise and food/beverages.
Visitors are a captive audience. You are allowed to bring your own food in to Disneyland, but let’s be honest, it’s not easy to do. First you have to buy the food, then prepare it, then carry it with you all day. If you’re flying in from out-of-town and staying in a hotel it’s likely you’ll just pay the prices for food and snacks at Disneyland. I can tell you from first hand experience that food prices are not cheap. A churro is $4.50. A hamburger is $12. A soda is $4-6, depending on the size.
How does Disney sell so much merchandise? When you exit a ride you walk out through a gift store. Your kid has JUST gone on the Buzz Lightyear ride and now, right in front of them, is a Buzz Lightyear figurine and a Buzz Lightyear bubble blaster! Of course they are going to ask for the toy. Most parents will resist most of the time, but if you’re visiting from Omaha and this is a once-in-a-lifetime trip there’s a good chance you’re going to just go ahead and purchase that souvenir.
These souvenirs and Mickey ears and marked-up food add up to huge additional profits for Disney.
And as a parent you’ll happily pay the money to see your kid this happy.
Keeping old movies and characters relevant
Here’s the most amazing thing about Disneyland to me – Disney is making these huge sums of money based on characters and movies that are decades old. Let’s look at some of the rides in Fantasy Land (where we spent the majority of our time). Below I’ve listed the ride, what movie the ride was based on, and when the movie was released:
- Peter Pan’s Flight (Peter Pan – 1953)
- Alice in Wonderland (Alice in Wonderland – 1951)
- Mad Tea Party (Alice in Wonderland – 1951)
- Pinocchio’s Daring Journey (Pinocchio – 1940
- Dumbo the Flying Elephant (Dumbo – 1941)
- Casey Junior Circus Train (Dumbo – 1941)
- Mr. Toad’s Wild Ride (The Adventures of Ichabod and Mr. Toad – 1949)
What do you see here? Every one of these movies is 50+ years old! Disney was able to create movies and characters and has found a way to leverage that intellectual property for over 50 years. In effect, Disney has found a way to turn every movie into a perpetual income stream.
And of course there are rides in other areas of Disneyland like Buzz Lightyear’s Astro Blasters (Toy Story, 1995) that not only leverage existing IP but also keep it relevant and interesting to kids today. A kid tells his parents he wants to go to Disneyland because he wants to go on the Dumbo the Flying Elephant and Casey Junior Circus Train rides. While at Disneyland the kid also rides Alice in Wonderland and Mad Tea Party and now wants to see Alice in Wonderland. Everything is cross promoted in perpetuity.
Wash, rinse, repeat. It’s a fantastic business model.
Disney as an investment
Of course, as I’ve discussed a few times on this blog, just because something is a great business doesn’t make it a great investment.
I made it a point to not look at any of Disney’s financials before I got to this point in this article because I wanted to first look at Disneyland (and by extension, Disney) as a consumer. Now that I’ve decided that the theme parks are a gold mine let’s look at the rest of Disney.
First, let’s pop over to Disney’s Q4 earning release. For the fiscal year ending Oct 1, 2016 Disney’s profits were up 16% from the previous year. For the Parks and Resorts business segment sales were up 5% and profit were up 9% (from $3B to $3.3B). That’s what we’d expect to see – raising prices results in pure additional profit. If Disney raises ticket prices by 5% they should see more than a 5% increase in profits from those tickets.
For the entire company profits were up by 12% from 2015, from $8.38B to $9.39B. This works out to $5.76/share. At the current price of ~$107 we get a PE of 18.75.
Over the last year profits were up 12% to $9.39B. 5 years ago profits were $5.68B, which means Disney has grown profits at 13.4%/year. That’s impressive growth for a company that’s already a behemoth in the entertainment industry.
Most of this growth came from the Studio (movies) segment (profits up 37% for the year). This is a much more volatile part of Disney business than the Media Networks or Parks & Entertainment divisions. The movie industry can be very hit or miss and profits tend to be lumpy. Recent growth is being driven by the new Star Wars movies (movies 7, 8, and 9 in the franchise plus additional spin-offs like Rogue One and the upcoming Han Solo movie). At some point the Star Wars gravy train will end. However, Disney has shown the ability to continually create new hits through the Pixar and Marvel studios.
And here’s the thing – Disney has steady income from the Consumer Products (merchandise) and Parks & Entertainment divisions. Those profits allow Disney to do acquire additional intellectual property to cross promote. In that way Disney reminds me of Johnson & Johnson. The steady profits from one part of the company (Bandaids and Tylenol for J&J, Disneyland and Mickey ears for Disney) provide a steady cash stream to reinvest in other, more volatile areas of the company (pharmaceuticals for J&J, Studio & Media for Disney).
Risk
The major risk is their Media Networks division. This includes ESPN, which has seen the number of subscribers drop in recent years as more and more people downsize their cable packages or go to an à la carte model.
ESPN is still the highest-rated cable channel, in part because sports are naturally resistant to time shifting. I don’t care if I watch “Designated Survivor” the day it airs. I’m happy to record it and watch it a few days later. But when I watch an NFL playoff game I NEED to watch it live. Part of the appeal is that what you’re watching is unscripted, unpredictable, and unfolding in real-time right before your eyes.
The downside of live sports is that you have to pay a lot of money to secure the rights to broadcast them. ESPN has huge fixed costs from these sports broadcast licenses. The network recently invested somewhere in the ballpark of $12 billion in NBA rights for the next nine years and $7.3 billion to air the College Football Playoffs through the 2025-2026 season. Their current contract for the rights to Monday Night Football runs through 2021 and costs $1.9B per year. ESPN is still on the hook for those payments, regardless of what happens to their subscriber numbers. If subscribers continue to drop then ESPN could very well start posting losses. And most of these deals are locked in for at least the next 5+ years.
I’m always wary about companies that don’t have control over their input costs. Companies like Netflix and Pandora are generally bad investments because they have to license their content. The content creators (movie studios, music labels, and TV networks) decide the costs. This leaves Netflix and Pandora with very little pricing power. While Disney creates a lot of their own content, for ESPN they are forced to pay these high licensing costs for the content that makes the network popular. If ESPN were to stop carrying these sports they would lose most of their subscribers overnight.
Conclusion
So, back to the important question – is Disney a good investment today?
I don’t think so.
Not only is the engine behind 50% of their profits at risk due to declining subscriber numbers, but Disney’s debt has been steadily climbing over the last few years. In 2011 the total debt was just under $14B. In 2016 it was $20B. It’s not yet something to worry about (Disney could pay it off with 2 years of profits), but a 50% increase in 5 years is pretty substantial, especially during a period of all-time high profits. Plus, about $6.5B of this debt is due by the end of 2019. It looks unlikely that Disney will pay it off, so they’ll need to refinance at what will almost certainly be higher rates. This will hurt future cash flow.
And at a PE of 18+ Disney isn’t exactly cheap. I don’t think the risks have been properly priced in. If Disney was available at a 25% to 33% lower PE, or if they find a way to stem subscriber losses, I would back up the truck. Disney is a great business. Every movie it releases results in a permanent income stream through cross-promotion, sequels, and merchandising. Unfortunately, 50% of their profits come from a business segment that experiencing technological disruption. If there was a way to buy only the studio and parks divisions at a reasonable price it would be a no-brainer.
I’m moving Disney to the top of my watch list. It’s a great business, but today I don’t see it as a great investment at these prices.