In 1918, while training in Chicago for a Red Cross deployment, a young Walt Disney was stricken with the Spanish flu. He eventually recovered, of course, and along with his brother founded what would become The Walt Disney Co. (ticker: DIS).
Back then, just as we’re experiencing now, the world was dealing with a pandemic. Only this time around, it’s the company Disney helped found that is in need of recovery.
During the company’s latest quarter, which ended June 27, the pandemic cost Disney a $4.7 billion net income loss from continuing operations as the company closed its theme parks and retail stores, suspended cruise ship sailings, dealt with supply chain disruptions, pushed back movie releases and saw advertising sales drop for direct-to-consumer services. That’s a stark contrast to last year at this time, when Disney posted a profit of $1.43 billion.
The company known for the House of Mouse suffered its first quarterly loss since 2001. According to the company’s most recent earnings statement: “The most significant impact in the current quarter from COVID-19 was an approximately $3.5 billion adverse impact on operating income at our Parks, Experiences and Products segment due to revenue lost as a result of the closures.”
Although more fallout from March’s market downturn is expected to hit Disney’s bottom line next quarter, the pandemic’s economic effects won’t last forever. The company’s business was on strong footing before the outbreak. That said, Disney’s recovery will take time, and its shares may not be a buy just yet.
Following the company’s earnings report this week, many investors are asking, “Should I buy Disney stock?” Before you make a decision, here are some things to keep in mind:
— Pros for buying Disney.
— Cons for buying Disney.
— Getting the timing right.
Pros for Buying Disney Stock
One of Disney’s signature pros is its portfolio of strong brands. The company has a deep bench of classic movies and contemporary blockbusters. In addition to generating revenue at the box office, franchises such as Star Wars and Marvel produce cash flow from streaming sales and licensing for consumer products.
Disney’s top-notch intellectual property holdings give it protection from competitors, which would have to spend a lot of time and money to rival the company’s holdings, says Markus Hansen, senior research analyst at Vontobel Quality Growth, a boutique of Vontobel Asset Management.
The company’s intellectual property helps drive the popularity of its theme parks. The segment containing Disney’s parks and resorts in the U.S., Europe and Asia was its top revenue producer the quarter before the pandemic, bringing in nearly $7.4 billion in revenue and more than $2.3 billion in operating income.
A compelling growth factor is Disney’s combined portfolio of consumer services including Disney+, Hulu and ESPN+, which account for more than 100 million paid subscriptions worldwide, as stated by Bob Chapek, CEO of The Walt Disney Co., in the company’s recorded third-quarter earnings webcast.
On the heels of the earnings call, investors seem encouraged by the strong results from Disney+, with its subscriber growth and its premiere of the long-postponed remake of “Mulan,” which will be available through its streaming service in September.
Disney+, which launched last November, has seen widespread success through its release to international markets.
Disney+ alone holds 60.5 million paid subscribers globally with continued growth, and more content is being created for the platform. More launches of Disney+ are set to continue in other countries throughout the rest of the year.
The company also has a strong balance sheet, including more than $8.7 billion in cash and cash equivalents. Hansen says the company is on solid footing for the next year to 15 months, even if the pandemic doesn’t improve — a situation he considers unlikely.
Cons to Buying Disney Stock
Disney’s earnings in the third quarter show that theme park and resort closures along with cruise ship sailing suspensions are major threats to DIS stock. The company reopened Shanghai Disneyland in May. Hong Kong Disneyland also reopened in June but closed again in July due to pandemic concerns. In the most recent quarter, Disney’s Parks, Experiences and Products segment saw an 85% decline in revenues.
Robert Johnson, professor of finance at Creighton University in Omaha, Nebraska, says that a return to normalcy for theme park traffic will take much longer than many optimists assume. He says that while some leisure travelers are soon going to be willing to get on an airplane and travel to crowded theme parks, there will be enough who won’t that Disney’s revenue will continue to see a sizable dent.
Disney’s Media Networks segment saw negative impacts from lowered advertising revenue due to suspensions or cancellations of live sports events. The segment managed to eke out a 6.6% gain in operating income, only a slight difference from $6.7 billion over the same quarter a year ago, in part because of lower programming, production and marketing costs. ESPN saw lower advertising revenue as viewership declined because of the rescheduling of live sporting events, including the NBA and MLB.
“With live sports virtually shut down and no clear idea if, for instance, college football will resume in the fall, the value of the ESPN holdings is in question,” Johnson says.
A shortage of programming could also affect Disney’s Studio Entertainment segment. This side of the business has been hit with the impact of theater closures across the country. In the most recent quarter, the segment posted a 16% drop in operating income compared with the same period a year ago.
Meanwhile, Disney’s streaming services have benefited from the stay-at-home economy. Revenue and paid subscribers in that segment — Direct-to-Consumer & International — increased during the most recent quarter, but its operating income was still in the red. The segment was a money loser even before March’s market sell-off and isn’t expected to add significantly to Disney’s earnings for some time.
With revenue from streaming services not anywhere close to what its Media Networks segment is generating, Disney continues to face headwinds that were blowing even before the pandemic. The general consumer trend has been away from traditional broadcast and cable networks and toward internet-based streaming services, says Jason Ader, CEO of SpringOwl Asset Management.
When Should You Buy Disney Stock?
When it comes to adding DIS shares to your portfolio, industry experts report competing timelines.
Disney’s streaming business is headed in the right direction and its parks will eventually reopen, so there’s no reason to believe that the company’s long-term earnings power has changed, Hansen says.
For now, though, the market is correctly implying earnings weakness through the course of this year, he says. Over the next five to 10 years, however, Hansen says it’s realistic for Disney’s stock to climb back to the $150 level and then head toward $200. For those with that sort of long-term time horizon, Disney’s stock is a buy at today’s levels (around $127), he says.
Johnson says now isn’t a good time to be buying Disney’s stock. “Despite the recent stock price advance following better than expected earnings, I would counsel investors to forgo purchasing Disney stock at the present time. From a valuation perspective, Disney appears richly valued, selling at 44 times trailing 12-month earnings.”
Ader recommends investors with a long time horizon should put Disney on their watch list. Then, if there is a resurgence of the virus this fall — when there may also be political uncertainty surrounding the presidential election — this could push Disney’s stock back below $90 per share. That would be a better time to buy, he says.
While analysts may disagree about when to buy DIS, one thing is all but certain: The company has plenty of staying power.
“Disney is going to recover,” Ader says. “I guarantee it’s going to be around 100 years from now.”
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