Episode 53 | Behind the Magic: Understanding the Business of Disney

In Episode 53 of “Market News with Rodney Lake,” Professor Lake, director of the GW Investment Institute, assesses Disney’s investment value and future outlook. Lake highlights Disney’s strong brand and diversified business model spanning entertainment, experiences, and sports, but notes challenges including slow revenue growth, high content costs, and stiff competition in streaming from Netflix, Apple, and Amazon. He addresses optimistic financial performance with Disney’s gross margins improving to 37%, net margins projected to reach 11% for the 2025 fiscal year, and growing free cash flow now at $10.8 billion. Although CEO Bob Iger is credited for stabilizing management, future capital allocation decisions and asset monetization warrant observation from analysts. Likewise, Disney’s balance sheet, which has $43 billion in debt and only $5 billion in cash, remains a concern for investors.

Transcript

Thank you for joining “Market News with Rodney Lake.” This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the director of the GW Investment Institute. Let's get started.
Welcome back to “Market News with Rodney Lake.” I'm your host, Rodney Lake. We're coming to you from Duquès Hall. Duquès family studio, right here in the heart of Foggy Bottom at the George Washington University School of Business. This is a GW Investment Institute podcast. Thank you if you're watching this show for the first time and welcome back to anybody that's watching on YouTube or you're listening on Apple or Spotify.
Welcome back. All right. Today we're going to be breaking down a company that's in our portfolio that everybody probably knows about, that we've owned for quite some time, but I think it's time to use the framework to break it down. Business, management, price valuation and balance sheet. That is the GW Investment Institute Investment Framework, BMPB. If you've been watching the show, you know what it is.
But we're going to go over the company, Disney. The ticker is DIS. And I'm sure most of you people have at least heard of Disney. You've probably been to one of their parks in Florida or California or Paris or Hong Kong or Shanghai, maybe. Or maybe not. But I'm sure you've heard about this company and maybe you have the streaming service for Disney.
So let's start to break this company down. Most of you are aware of this business. Sometimes when we talk about these industrial companies, you may not be aware of what, you know, this particular industrial company, like when we talked about Emerson, for example, what they do or heard of them, what products they have. But certainly most people understand Disney very top level as a business, and likely because they've interacted with their products.
They've bought things at the store, they've gone to one of the parks, maybe they've gone on a cruise. So I think it's pretty rational to to think, okay, we all know what this business is, but we're still going to break it down, with the framework here. So let's dive into the business. So you know, what does Disney do right.
So they have you know, obviously they have they're one of their newest businesses is the streaming business. And but they break it down: entertainment, experiences, and sports. And certainly on the sports side, that's the ESPN and what you people have heard of. And so an interesting to see what's going to happen with that business.
The entertainment piece there is the movies is the streaming experiences of the parks and cruises, for example. And the vast majority of the businesses in the entertainment piece. But that actually has been, you know, less growth there over the last three years. And then, over the last three years, you've had 27% growth in your experiences.
So people are heading back out to the parks, going on cruises. And so that's been an area of growth in the sports. You know, they just broke that out not that long ago, but that is a significant piece of the business. So if you look at the 2024 revenue breakdown, 41 billion approximately for the entertainment portion, experiences is 34, and sports is 17.
All right. So now, we we jumped right into revenue, but we want to make sure that we back up here. Let's talk about the market cap. I know most people again know this company, but we're going business, management, price valuation, and balance sheet. Balance sheet. On the business side here. How big is this company? This is a $215 billion market cap.
So this is not a small company. But again this is not in the league of Microsoft, Nvidia, and it's actually much smaller than a company like Netflix, who they compete with directly on the streaming service. And so Netflix, you know, twice as big or bigger right now, on the market cap size. And so that's obviously a big challenge, on the competition side for the streaming.
And there's lots of competitors, which we'll talk about a little bit here. But on the business side, now, let's get into their revenue. So just, you know, market cap 215 billion. And this is in July, late July of 2025. What's the revenue look like? And so for the last quarter, reported here for the for the trailing 12 months, last 12 months, for March 29th, 2025, revenue of 94 billion.
So that's that's a big number, obviously, and that's a lot of revenue. The growth 5.4%, not a huge growth number. And so as we talk about and we've talked about in the past, and we talk about with our analysts, make sure that you obviously look at where the revenue is now. And we're most concerned about what's happening now and really what we think is going to happen next.
What's going to happen in the future, what's going to happen three years from now? What's going to happen five years from now? And then we're trying to invest, you know, with that in mind. Well, how can we understand that? Well, to add some additional context, let's look back. What has the company done and why do we think it might be the same or different from what what they have done?
Is there a catalyst, for example, in there that's going to drive revenue further ahead? Or maybe it's going to stay the same stagnant decline that's for, for us to decide. And I'll give you the consensus numbers. But if you look back for 2021, 67 billion, you had 3% growth. And then in 2022, 83 billion, 24% growth, obviously, you have some Covid, related activity there or inactivity back to activity.
But then 23, 6.2% growth and 2.8% growth in 24 to 9, 90, from 88 to 91 billion and now at 94 billion. So that's much more normalized. And you have to sort of understand what what was happening in that time period for that 24% growth. But now you're talking single digits, right? So from 24 to 25, you're talking 3%.
Now you're looking at five for the trailing 12 months through March. Their fiscal year is the 9/30, fiscal year. So for next year, the projected 9/30 full year of 25 for this year, rather 25 is 4.1%, 95 billion. And then you're looking at 100 billion, 5% growth for the 26 number for the revenue side, these are not big numbers.
Right. So you're not saying oh, well, this is a growth machine. And lots of people had expected that you're going to get significant growth. And some of that growth did come from the streaming platform. And on the streaming platform, that's still a big expense as well. And they've talked about when is it going to break even? When is it going to be profitable?
And Bob Iger, the CEO, has talked about that before. And it looks like, you know, that maybe they have not hit that on a full year basis yet. But and that's a big challenge. You know, the content wars, if you would like to say are significant and the cost to produce these movies, this content is very expensive.
And again, they're competing against deep-pocketed individuals or companies rather, in those categories. So if you think about who are they competing against for these streaming platforms? Netflix. Plenty of cash. Apple. Plenty of cash. Amazon. Plenty of cash. So the competition is fierce. And and those competitors have real resources to deploy and to compete with them. So that's a competitive business.
And if you're, you know, a parent and you want Disney Plus you know but maybe Amazon Prime is a little bit cheaper, or maybe you already have it because you have Amazon Prime and you think, well, that's just good enough. Or maybe I have a Netflix subscription. Okay. Am I going to have all three now? Right. So I do think there is a challenge that people are maybe starting to say, well, maybe I'm not going to have three separate subscriptions.
Maybe there there are specific things. There's clearly over 100 million people that think this, that on the subscription basis for for Disney. But maybe there are some limits, maybe there is a saturation point that there are too many streaming services for individual households that are saying, well, you know, not that into a marvel. I'm not that into Star Wars or Pixar, so much that I, I have to have that.
So that's real competition. And again, you know, making that work and keeping those costs under control are difficult. And on the business side, one of the big advantages, if you talk about what's good about the business, well, what's good about this business. So Disney is iconic global machine. Right. And so they have parks spread all around the world.
So we mentioned some of those. The home the largest one is the home base is in California, but the largest one is in Orlando, Florida. Then you have Anaheim, California. And then in Europe you have Paris, and then in Asia you have Tokyo, Shanghai and Hong Kong. And they just talked about, recently, they're opening a park in the Middle East for the first time, and it's going to be in Abu Dhabi.
And so certainly that global awareness that global brand people know and love Disney and so iconic. And so that's a big strength for the business. Now they have this diversified revenue streams. And then some of that during Covid where the parks were not being attended at all. That's a huge hit. But they have this diversified revenue stream.
So they have a couple, you know, different baskets where revenue comes in. And so that's good as well. And they have this ability to monetize across these platforms. The in-person, the streaming, for example, the merchandising that that can be very good. They have a huge asset in the ESPN business. Big strength live sports continues even with, you know, people going, to different types of streaming services and being much more online.
Live sports continues to be a place to be. And you can see that in the valuation of the properties associated with that. For the teams that are being purchased as an example, as a proxy for the value for the industry, but also the TV rights associated with airing those live sports. All right, so business, what are what are we going to give this, before we move on as a score?
Well, probably I think you're between 7 and 8. We didn't drop down yet, but let's quickly review before we finalize the score here. What are the margins? So the gross margins here, 37%. Not bad in the net margins, 9.8%. What have they done over time? So if you look at 21, to the current here, and that I gave you the most recent quarter March 29th for those numbers.
So for the if you go back gross margins, 33% in 21, 35% in 22, 33 in 23, at 35 in 24, and 37. So they've actually ticked up a little bit. So it looks like by Bob Iger who had come back on management, you know, is doing a reasonably good job of trying to control costs. This is a big machine.
And it does take a lot of capital. But gross margins pretty good, net margins obviously not quite as good. So when you drop down, improving though. So if you look at the 21 number 3.5, 22 4.4, 23 9.6 and then 8.7 and full year 24 and then through the through March here 9.8 projected at 11 and a projected 11.2.
So not bad. Right. And so the gross margins continue to be good and improving. And the net margins are okay and slightly improving. So, you know, that's partly why I say for the business, I, I think a solid seven, is where they are maybe seven and a half. Hard to say an eight. When you have net margins, in the single digits.
And it is an expensive business, you do have to put a lot of CapEx into the business. And I'll just mention that here. If you if you think about now they are generating free cash flow. So if you look at the but CapEx here, in 21 3.5 billion, almost 5 billion in 22, almost 5 billion again in 23, 24 5.4 billion, and 7.1 billion in 25 and projected to be basically 8 billion for the full year 25, and then 7.7 for for the 26 full year.
So certainly not a cheap business to run. You got to put a lot of capital back into it. Free cash flow, though. Not bad. For if you look at the last, trailing 12 months here through March, 10.8 billion. So the free cash flow has actually picked up and that's a positive sign. So if you look at from the 21 number 1.9, if you look at 22 number you're talking 1 and then bumped up in 23 to 4.8, 8.5 and 24 again through March here at 25 10.8.
So a very good projected 8.6 for the full year for 25 through. That's their September again fiscal year and then 8.7. So those are not bad numbers. And certainly that has improved. And as we always encourage our analysts make sure you're looking at these numbers over time. We really care about where do we think these numbers are going.
Right. Because that's where we have to invest today. We have to make decisions today. Should be buying, selling, holding. We care about the past only as it informs us to make decisions about the future. Right? Is there is there a pattern that we can detect? Is there some catalysts that we know that, okay, these numbers are likely to change or stay the same, and how do we position ourselves accordingly?
So again, we're looking at the past only to help us think about the present and really about what we think is going to happen in the future. And that's as investors, as business people, as analysts. That's what we really have to be doing. But it can be instructive. All right. So again, business as a seven. So let's talk about management.
We'll just stay focused on Bob Iger who's the CEO who came back a few years ago. And look he has I think turned around you know what seemed to be sort of a disjointed transition from him. And so that seems to have recovered. Now, obviously this succession plan is still an issue. Who's going to take over?
It didn't work the first time part. Here. Let's see, what happens on transition number 2 or 2.0, version for the transition from Bob Iger. But as a performance for the person, you know, he's the one who put all these assets together. They bought lots of content. They owned great properties as we mentioned Marvel, Pixar as examples.
And so in Star Wars of course, Lucasfilms. So they own these great properties, right? That's in the streaming business. They have this iconic brand on their own Disney, the Disney parks, the Disney cruises. Obviously ESPN is a huge asset in there as well. And the sports overall, you know, they've been integrating technology into the business in the streaming platform in particular.
But what's management going to do from here? If you looked at the metrics and we talked about what's happening on the financial side, they definitely have been growing the gross margins. And if you look at the projected gross margins, which I did not mention, but worth noting, they're going to bump up for the full year 25 through again that September 30th fiscal year of 40, and then 40 again for the next full year, September 26.
Very good. Right. And then the net margins popping up, getting into the double digits, but low double digits 11 and 11.2. Full year 25 September and then 11.2 full year 26 through September. So that's good. So it looks like Bob Iger and company have maybe done a better job of getting these costs under control. They're really trying to get that.
You know what's going to happen on the business side for the streaming making that unit profitable very challenging. Content costs are high you know. And how do they, you know, deploy that capital efficiently. You know, there's obviously been some criticism or pushback on the number of dollars. And if they can't make that profitable, really, what's going on with that?
You can deploy that capital when we talk about asset allocation. And certainly that's something we talk about management. What's the capital allocation? Have they been doing it efficiently? Obviously they went through and acquired all these properties. What is Bob Iger and company doing with these. Well it looks suboptimal at least in the short term. You know the combination.
And it's up to them to really figure out how they're going to monetize all these properties and make them all profitable. But we'll have to see over time. And and we're going to get to the balance sheet. And that's something that's connected obviously to management because they're the ones who put all this into place. But something to watch.
How are they going to monetize all these assets on these platforms? They certainly have a big platform to do it. Both online and in person, across their properties. And so something to watch and certainly in for analysts in the fall, something that we're going to be asking them to watch is how are how is the management doing with respect to the allocation of capital over time, obviously purchasing lots of things and how they're monetizing those assets from here and then what they're doing about it.
Right. If it's not working, what changes are they are they making? How are they, you know, changing the mix of these businesses? Maybe they'll get rid of some. Maybe not. We'll have to pay attention. We'll be asking our analysts to do that. So for management, I think you're at seven. Also, I think it's decent. Not great.
I think on the capital allocation, a little bit of a overspend for, for at least for me, these are great, properties, but really levered up as well in the process. And we'll talk about that when we get to the balance sheet. So I think a seven Bob Iger, you know, himself historically good CEO, great CEO.
But you know, where we are now I think the capital allocation pushes that down a little bit. And so I think leadership wise seems to be very good. Got everybody singing from the same sheet of music again. But on the capital allocation I'd say a little bit off on that. All right. So let's move on to the price valuation.
So seven for that. Price valuation. So if we look at okay well where is where is this company valued? And the forward here. Not super expensive 20 times about 21 times PE price earnings multiple. And so that that's not terrible, right. If you look at sort of you know, where that sits within, you know, the the media world that's certainly high compared to some other companies.
It's certainly low compared to a Netflix, for example. They're going to be closer to 50 times. And so and hence they have a valuation that's really double theirs. And so, but you know, a really high PE, for this company probably doesn't make sense, given its growth, right. And so 20 times, 21 times seems appropriate.
So if you look at okay, well what's the the valuation been over the last, ten years. And so if you look at where they are now remember about 21 times a little under that, where have they been. Right. So they've been, you know, sort of as high as 130 times, which seems completely crazy in 21 and as low as 15 times, in 2018, over the ten year last ten year period, the median is 22 times, approximately.
So we're we're a little bit below the median. Right. And so, and, you know, we'll throw out the average because the range is so wide. So we'll really focus on the median. If you don't get that stats classes for you too. And so watch an episode on that. Not our episode. Somebody else's. But so let's use the median, to make sure we're not accounting for the outliers is really the case.
And so 22 times. So we're just below the median. So not crazy, cheap or expensive, kind of fairly valued relative to itself and certainly a little bit lower than the S&P. Right now. Again, in late July 25. So a little bit under the S&P, I would say it's, you know, not a bad valuation. Probably also give this a seven, right.
Is this a better business than the average S&P 500 company? I think so with the brand, with the properties, you know, execution is everything. I think the management is decent but still got a lot of work to do. But we can give it a seven. On the price valuation. On the balance sheet, which is super important. And then we'll we'll pull everything together here.
And wrap it up. All right. Balance sheet here. Where does Disney sit with respect to the balance sheet? Well I think this is a problem. And it's been a problem. And so if you look at the balance sheet currently again trailing 12 months March 29th, 2025 42 billion. Almost 43 billion in debt, 5 billion in cash. So massive amount of net debt, you know, 37, 38 billion in net debt.
I'm just rounding, of course, here. But the magnitude these are big numbers right on a $215 billion market cap. So not not great. And that's a big concern. So I think, you know, what has happened over time, we tell, you know, okay, well, maybe is this a one off? Is a directionally good. Well, even though that sounds bad, it was worse.
They had a little bit more cash in 21, but they had 15 billion in that debt. And they had preferred also out there of 13 billion. And so much worse situation in 21, or let's say the mix was different. Also a challenging situation. So at 22, 52 billion, 11 billion, in cash and 13 billion in preferred, and 23, 50 billion in debt, 14 in cash, 13 in 13.7 in preferred, and in 24 for the full year, 49 billion, in debt.
So you can say to actually decline it's been declining 58, 52, 50 and 49.5 and full year, 24 but 6 billion in cash. And they did drop the preferred to 4.8. That's good. And now trailing 12 months where are we through March. 5.8 billion in cash, 4.4 billion in preferred and 42 billion, almost 43 billion, in debt.
So they have been chipping away at that. But that's an enormous debt, a burden for the company. And so, okay, what else do we want to look at? We certainly we want to look at the interest coverage ratio for this. And so 5.8 times. So for us we'd really like to be closer to ten for whatever the company is.
And you know, Disney can be sensitive to a downturn in the market. So for us, that's, that is a concern. The level of debt, the interest coverage ratio of debt, not great. Directionally, they're moving in the right direction. So I wouldn't call it a five, but let's call it a six. Not great. One away from a five here, but let's give it a 6 or 7 is pretty much across the board.
Balance sheet is a six. And so business we give it a seven, management we give it a, a seven, price valuation of seven, six on the balance sheet, depending on how you want to round these scores, if you want to push them up or down a little bit, you're talking six and a half, 6.75. So you're below, a little bit below a seven here for overall for Disney.
And so what should you be watching as an analyst? So some of the things I would be watching, obviously we can start where we just left off. How is management managing this balance sheet? Right. And that's connected to management. Right. And so the balance sheet is managed by the management. And so super important. Watch what's happening with this balance sheet.
Are they continuing to make progress? If there is a downturn that debt burden is is significant. And the interest coverage ratio is 5.8 times. Not calling for a downturn. Actually very optimistic for the economy. But, you know, planted a little close there with the balance sheet. So that's one thing to watch. Another thing is obviously management doing that.
And then the capital allocation, that's a huge part of that. Why do they have all that debt. Well acquisitions of these large properties over time. And Bob Iger, principal architect for the current set up for the company, remains in charge. Succession plan. Another thing to watch, what's happening on that capital allocation. How are they monetizing these properties?
Very important. And so those are the primary things I would be watching. And then the next thing would be what's happening on the streaming. Can they make that consistently profitable, unit for the business. And then the last thing I'd say to watch, what are they doing with the sports and the ESPN? So those are the things I would be looking out for.
Again, let's put Disney at a six and a half here. Being a little bit more conservative overall. Not terrible. Not bad, not great. We own it. So we're going to have to watch it closely. Our analysts will do that this fall. That's it for this episode for “Market news with Rodney Lake.” See you on the next episode.
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