Disney Earnings Breakdown and Sticky Inflation Concerns

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Great to be with you, and this was a good block and Tackle quarter. It showed progression on the broader financial metrics of reducing costs and getting to their target this year of eight billion dollars of free cash flow. So there's financial discipline at Disney. But of course, as you've noted, there's a lot of moving parts, and ultimately what investors would like to see is growth that can

How profitable do you think they're going to be?

It's going to take time. Streaming is a very competitive business. Unlike other subscriber businesses of the past, like cable TV or even wireless, you have very high churn. Disney at least is discipline on the programming and content spending, which has come down significantly and in many cases pivoting their

Ken, I guess you know, one of the challenges for the Walt Disney Company and pretty much most of the traditional media companies is just kind of that linear TV broadcast cable television business. And Disney reported, you know, weaker result sales fell about eight percent in the quarter. How do you think these traditional media companies kind of manage the longer term decline of those businesses.

So what we're seeing, and it's a great question. And if we were all in business class, this would be a classic where you have a mature to declining business but it's still throwing off lots of cash trying to reinvest that and new growing businesses that hopefully have good business models. And I think what we're seeing is because of digitalization of advertising, that shift problem linear or legacy networks broadcasts to streaming is happening much faster. So that's a problem.

You know, Paul, you are recovering media investment banker, right, I mean I've heard about the death of linear forever. Yeah, So I mean, what do you think makes this time different? When you look at the outset?

What makes this time different is simply the revenue stream which really supported television for the last thirty forty years was subscribers from cable television and satellite TV, and that subscription revenue offset to decline in advertising revenue as advertising revenue went to different places, first cable and then did digital. Now that subscriber revenue is going away because of the

What do you need to be good?

I'll go see it, just be good exactly. Okay, well, there you go. So what do you think the strategy is there?

Ken, So we need to say better performance not only from Disney, but also the industry. And really, when you look at global box office X China, it's running twenty twenty five percent below where we were pre pandemic levels. Additionally, when you look at movies, you always go to the sequels, the ones that can break in large audiences, but sometimes they're flops and they're very costly. So I think theatrical which for Disney feeds not only into film, but it feeds into the genre of their parks.

You know, it's a big deal.

And I think when we look at what Bob Iger wants to do there, he has talented people now now running those businesses. But even if you've got a big hit, you know, you look at paramount with top Gun Maverick over a year ago, it has not that much impact on the stock or what analysts think in terms of

I mean, let's be honest, guys, Maverick had an issue because Barbie. I mean, that's what really happened. Barbie trumps Tom Cruise. Let's call it, as you mentioned something earlier, and I wonder how that's going to tie into the parks experience. But also you mentioned in terms of streaming, and that's the AI component. How would AI help Disney do all the things you just said?

There is incredible work that I'm sure Disney is doing to be competitive and on part too great companies, whether they be Amazon, Meta, Google, or Netflix. So it's an enormous effort on the technology side to have intelligence for personalization, and I think AI will play a role in personalization of subscriber viewership, but they can't tell that message because they're playing multi year catch up to the companies I've mentioned. So it's a big deal right now. It's a competitive

All right, Ken, Thanks so much for joining us.

Really appreciate that as always, Ken Leam, he's a director of research at c f r A Research.

We appreciate it.

Let's check in over our next guest here, Steve Iceman, senior portfolio manager at Newburger Berman.

All right, I'm.

Looking at I guess Steve, you're on the Odd Lots podcast recently and you said that you are bullish on stocks that gain from artificial intelligence power needs.

What does that mean?

Well, good question, Thank you.

I'm front running Alex because Alex is our energy.

The current the current GPUs use about three times more electricity than your typical CPU. So the grid in the United States has been under pressure now for years. You know, utilities keep increasing their cap bax budgets, and now you've put an entire new pressure on the on the grid. So whatever money is being spent on the grid is going to keep going up, probably for the next ten years.

That's fair. Yes, if you demand's gonna.

Growup by it has no to do with himself. He can't satisfy all of the demands. So that's just just one example. But there are other companies that benefit as well. But that I look, I think there are three major themes of our time, AI, infrastructure, and crypto, and I believe in the first two and I don't believe in the third.

So just for framing here, I mean, you really made your name through the housing crisis and betting against housing dead back in two thousand and eight. You're portrayed in the Big short film by Steve Carelling.

You had to bring that up, but okay.

I did, But just to give context, if our viewers or listeners don't know, like you have a history of betting, having contrarian bets that pay off big time. Yes, what would be that contrarian bet? Out of the three things you just said, what's that big contrarian bet?

I don't have a contrarian bet here. I mean I don't like crypto.

I like in crypto feels contrarian.

Well, it's contrarian, and that says that I don't believe in it. I think the whole thesis behind it is wrong. But you know, shortening a cult when there's no when there's no data to prove that it's wrong, because a death wish, you know. So what do I mean by that? So when you when I bet against subprime mortgages, every month securitizations produce data. They give every single credit quality data possible, so every month you could check it.

You could look at it.

Every month you looked at the fact and that and that fact credit quality was the major determinant of the value of subprime mortgage paper. So you had a data point every month, a massive data dump. Crypto trades on ether. You know what is a trade The thesis that crypto of crypto is that it's a hedge against fear currency, so it's like digital gold. But it doesn't trade like that. It trades in perfect correlation with NASDAC, so it trades against its own thesis. So what data point is there

I mean, there's a lot of folks in the marketplace saying, you know, this Federal Reserve is going to cut rates in twenty twenty four, maybe not as many times as we originally thought, maybe not as much as we originally thought, but that this economy is in good shape, but still there might be some rate cuts here.

Is that kind of the backdrop that's for you? Or how do you think about it?

I mean, the why I think about it is that Powell is a dove. He has always been a dove. Raising rates was completely against his nature. He wants to cut rates because he always wants to cut rates. The data is not completely in his favor. So maybe they cut once. Do I think they should cut it all? I would personally, I would wait, but trust me, nobody consults me.

No one consults us either. It's very fair.

So I think they'll probably cut once. It's my guess.

So does that affect so the thesis that you have, like at the infrastructure, the power demand and AI general and AI in general, does what the Fed does.

It's irrelevant, irrelevant.

Does it change how you play those themes or of timing?

Okay, I mean this is how what I think credit quality in the United States is fine other than office real estate, and office real estate is not big enough to sink the economy. It's a problem. It's a regional problem. It's a regional bank problem. It's some investors problem. If consumers not over levered, the housing market is not in fuego, there's a shortage of housing. So all the all the and the financial system of the United States has never

Right, all right?

In terms of getting a life on AI, a lot of well, I'll just speak for myself. I'm trying to figure out how much of this AI stuff and I'm putting in air quotes here for our listeners. Is incremental tech spending or is it just taking some money from it or other tech budgets and putting it to.

It depends on which subsector talking. Okay, So if you're talking about the semiconductor sector, where it's video or a m D, it's it's massively incremental, you know. If you're talking about overall tech spending at this point, not clear. What's what is pretty clear is that companies like some of the IT consulting companies have no revenue growth because it's taking Peter to PayPal. So and software unclear, So it's it's only very clear in hardware.

Let's overlay the presidential election with these thesis.

The thesis.

Thesis is plural and okay, it's important. I took Latin from the.

CS, but this is a thes THECS.

Okay, So what is your prediction for the election, and how does that impact because a lot of what you're talking about is driven by fiscal policy.

Okay, so let's let's backtrack for a second. So, first of all, caveat whatever I'm about to say. I am not speaking for Newburger Barman. I'm speaking just for myself because I don't want to get into trouble. So it's May seventh, We're how many months? Five months? Six months from the election, very f and as far as I'm concerned, the election is baked. It's done, which is and Trump's gonna win, and I think he'll win every single swing state,

All right, We'll see how that plays out in the market life. Steve Iisman, thank you so much for joining. Steve Heisman is a senior portfolio manager at Newburger Berman.

Joining us live here in our.

Bloomberg Interactive Brokers studio. Let's see where this economy is going here. Francis Donald's going to help us out with that. Chief econmerce at Manual Life Investment Management. Francis, thanks so much for joining us here. I know I'm not really sure where the market is here in terms of this Federal reserve for a while there, we started out with a lot of cuts factored into the market, then fewer and fewer and fewer, and then there's even talk of a rate hike. Maybe that seems to be off the

You mentioned two words earlier. We have two words too. FED cuts are gonna come later, but then much faster than this market has been pricing in now. We've already been seeing that later to a certain extent. And let's just simply because we do expect the labor market in particular to decline, we do expect inflation to decline. But we have a few more months before the data we'll

View, So your two words are later and faster. Basically, what gives you the confidence that we will see a material downturn.

Leading economic indicators, So just about everything in the labor market that explains where we are in the labor cycle is pointing to a deterioration. Now, we're not calling for the end of the world. We're not saying it's a big crisis, calling for two quarters of negative GDP. Q three and Q four could be Q four and Q one. Well know, as we get closer to it, we've got business Employment Development data, nine million companies telling us there

From this point, we're hearing a similar type of commentary coming out of the Walt Disney Company. I'm reading the research react from Bloomberg Intelligence Keith wrong Anathen Disney commentary on a normalization of demand that the theme parks will weigh on sentiment. Even after the segment posted a solid twelve percent operating income in fiscal Q two, guidance for the parks in Q three is weak with no growth, suggesting for your estimates might be at risk.

So there's an.

Example, Francis of you know, at data point suggesting maybe the consumer's strength is kind of waning. Here is that where you think you might see it from the consumer per se, you're likely.

To see it across businesses and consumers, because that's how raid hikes work. The average time between the first rate hike and its impact on businesses and consumers is two years, so we're not exiting the period in which rate hikes become really impactful in the economy. We are entering that period. The mistake was in thinking that we'd see the impact earlier because of how fast and intense the rate hikes came. We're just entering that period. This is old fashioned economics.

Well, I think that's such an interesting point too, especially as the high income consumers also have those low mortgage rates right, so they're also benefiting from that lower end consumers may not be owners at all. So I guess my question is, and this where it kind of ties to Disney also, is this a real retrenchment or just we had so much spending, we had so much safe

So I love this question. Are we just heading towards a normalization? Is effectively what I think about. If you look at the year over year charts, most of them signal this is a really strong contraction. Things like the Sam rule or a lot of things showing the unemployment rate is ten percent higher. Does that work when we've just come off of really low bases or really high highs. I'm a second derivative gal. I gotta say most of the time, momentum in year over year is the powerful indicator.

Francis, what do you think about the labor market here?

Again?

It seems to be so resilient for so long here. Are you concerned that there may be some cracksness labor market or do you think this economy can continue to support a maybe a sub four percent unemployment rate.

We're pretty close to four. We'd have to stay at three point nine percent now through the rest of the year. WHI seems a little tricky. So I think again, you have some old fashioned components here. If you look at temporary employment average, weekly quit rates, hiring rates, even conference board confidence data on jobs hard to find minus plentiful. Check the service employment index under the services PMI, that's deteriory to levels that we've only really seen in really

Francis, thank you so much for joining us again. We always appreciate getting your thoughts and commentary. Francis Donald, Chief Economists and Manual Life Investment management.

Folks.

Your daily look at the front pages around the world, mister John Tucker. Newspapers A lot of them out there, Not.

As many as there used to be, but a lot of newspapers out there.

Although you go to a you go to an office in London, let's say just you have a meeting in an office on money. You go into the waiting room, dozens of newspapers on the table.

There's it's still big.

In one it's an interest. You go down a city hall, Room nine is the press press room, and outside is a plaque of all the newspapers that have gone out of business in New York City. It's it's a big list, and it's kind of sad.

I don't know if you guys know that. But you can also get papers on the interweb.

Now really, really, it's amazing.

I'm going to tell Caro Massa that she doesn't have to print out every single piece of information that you can have it like maybe on Ruth.

Okay, well let's start here. If from the Bloomberry cause morning, if if you if you want to get somebody's attention on Wall Street, what do you say?

Or everyone clicks on the Bloomberg terminal.

Oh I can imagine after after two pretty lackluster years, they are set to jump, especially on desks that help companies tap markets or trade their bonds. According to report today from the compensation consultant Johnson Associates, bankers who underwrite debts may see payouts swell as much as twenty five percent, deals picking up this year. For bond traders. In equity underwriters, the incentives may rise twenty percent. Alan Johnson is the

This is way, way, way, way too early to be even talking about bonuses. I've had managers come in when I sit in my bonus meeting and we ripped it the entire year. Some knucklehead lost a couple hundred million dollars in like the last week of the year, and that is the excuse. My boss is like, we're not going to pay you.

Like what so, I mean, yeah.

See average cash bonus that declined two percent last year? What was one hundred and seventy six five hundred dollars.

Maybe they're like, please don't go to a hedge fund or something, right, Yeah.

But it's explain to everybody you live on your bonus.

You used to, it used to.

I mean back in my day it was ninety to ninety five percent. My annual compensation was my bonus. That's changed now they make it much more your salary versus your bonus, but still the bonus is material.

Ninety nine percent was your bonus. Yes, yeah, holy mollypaans yep.

All right, let's do this one from the wall Street Journal kind of skipping around here. Men happier at work than women. That's how they feel overall about their jobs. Most workers are positive. You dig deeper, though, you find about sixty five percent of men say they're happy with their jumps compared to sixty percent of women. The largest gaps and satisfaction between men and women related to financial benefits.

And we know, I'm shocked.

I'm shocked by this survey.

Well, I think I think a lot of people at the top might be shocked or maybe on informed.

Really you should talk to people and they wouldn't be so shocking.

I mean, I remember, you know, when Matt Miller came back from Germany for Bloomer, he worked and he was again kind of it just shocked and to come back here and to say, oh, in Germany we had just wonderful health care is free of chargela. Now he's paying a jillion dollars and his daughter is in like the basement of some church in Westchester, you know, paying a million dollars.

And that's that's a good slot.

Yeah, that's a good slot. And that's a good slot for a good slot. Yes, so very tough.

All right, let's do this one. Also, Uh, what happened to the tax crew. It's more governments are slapping fees on electric vehicles. Reporting for Bloomberg this morning. You know, we also thought governments were trying to encourage the use of evs, but the shift away from combustion engines that is actually leaving one hundred and ten billion dollars hole in government revenues owing to a drop and receipts from

Taxes, so to this point. Actually, I think there was an article on the Ft yesterday that talked about in Germany in particular, they're rolling back some of the substus that they gave, not just for things like evs for example, but like heat pumps and stuff like that. So consumers spent a lot of money to then get a rebate, and then all of a sudden the rebate goes away. They don't know if they're going to get it or not.

Yep.

And we'll conclude with this one from Bloomberg. Oh my gosh, Oh my gosh. Taylor News. Apparently the Paris Olympics is drawing luxury travel demand. But guess who is the bigger draw this week? The Superstar playing four shows at led Defense Arena. This is just outside the capitol, so kicks

I looked to us selling Tucker earlier. I looked into this just for fun, and it would be cheaper to go to like Sweden and see the concert, or even Paris or the UK and see her concert than to go to Miami. Yep, in terms of the ticket prices. Just putting that up.

But I'll note over the weekend, who drew like a gajillionah one fans down in Madonna?

Where was she?

Oh, Brazil.

That question, Yeah exactly, but I mean Madonna still, I mean like hundreds of thousands of yeah, came to see her concert down in real She's Madonna, she is, I mean Madonna, all right, And I was John Tucker with our newspaper segment. This is the Bloomberg Surveillance Podcast, bringing you the best in economics, geopolitics, finance, and investment. You

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