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 needs recovery.
During the company’s latest quarter, which ended Oct. 3, Disney estimated its operating loss for the quarter across all segments to be $3.1 billion. DIS plans to suspend its semiannual cash dividend payment to shareholders for the second half of fiscal 2020. Revenue for the fourth quarter was $14.7 billion, with earnings per share (EPS) down 20 cents compared with $1.07 in the same quarter last year.
Although the fallout from the pandemic 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 a 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 in early November, many investors are asking: “Should I buy Disney stock?” Before you make a decision, here are some things to keep in mind:
— Pros of buying DIS.
— Cons of buying DIS.
— Getting the timing right.
Pros of Buying Disney Stock
Disney’s direct-to-consumer business has given the company an edge with its streaming services growing faster than expected.
The quarter recorded more than 73 million paid subscribers to Disney+, 10 million for ESPN+ and 36 million for Hulu. Disney+ launched in November 2019 and has seen massive success in 2020. Disney’s subscription services have been a strong play for its business.
Combined paid subscriptions to Disney+, ESPN+ and Hulu have reached more than 100 million within a year. With Netflix ( NFLX) holding a global subscriber count nearing 200 million, Disney is not too far behind. The difference between the two streaming services is that Disney has strong intellectual property, says Markus Hansen, portfolio manager at Vontobel Asset Management.
“The powerful consumer product offering that Disney has is not just something you watch on TV but experience. Unlike Netflix, Disney owns the products it puts into streaming, and that’s very powerful because of their ability to leverage that into other products,” Hansen explains.
Disney uses its products to draw in customers, who are then used in the Disney+ platform. Hansen explains this kind of IP has the power to control the consumer experience. While the company’s subscription services have yet to generate profit, Disney continues plans on expanding its streaming services globally with Disney+ Hotstar, which launched earlier this year in India, with plans to launch in Latin America on Nov. 17.
Hansen says he thinks there will be a lot of excitement coming from strong streaming trends.
Cons of Buying Disney Stock
Disney’s earnings show that theme park closures are the major threat to buying DIS stock.
Similar to last quarter, Disney’s parks, experiences and products segment took the hardest financial blow in the fourth quarter. The company reported a $1.1 billion operating loss alone in this segment because of domestic and international park closures.
This comes as positive news for Disney as the outlook for the reopening of its facilities to full capacity is projected in a more certain timeline, whereas earlier in the year, there was much uncertainty about Disney’s reopening since the health crisis was a primary concern.
What this quarter is telling us on a greater scale is that we can expect some form of reopening in the second half of the second year, explains Pierce Crosby, general manager at TradingView in New York City.
“We have some clarity as to the future of theme parks and cruises and that it itself irrespective of numbers is a more positive scenario than we had even two weeks ago,” Crosby says.
Disney theme parks in Orlando, Florida have opened at limited capacity, but its California location still remains closed into 2021, which is a sour point for the business.
ESPN digital and ESPN+ have also been performing well, with ESPN advertising revenue up 26% in the fourth quarter due to the return of live sports but still below the prior year, according to the company’s earnings webcast.
Disney’s media networks segment will continue to face headwinds from lowered advertising revenue if live sports don’t resume soon. The segment managed to eke out an 11% gain, with $7.2 billion revenue during the fourth quarter and an operating income decrease of 7% to $1.2 billion due to lower results at ESPN, in part because of costs related to NBA and MLB program rescheduling from the third to the fourth quarter.
When Should You Buy Disney Stock?
When it comes to adding DIS shares to your portfolio, industry experts consider short-term and long-term perspectives.
Disney’s streaming business is headed in the right direction and its parks will eventually fully 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 believes it’s realistic for Disney’s stock to climb back.
“Coronavirus cases are rising rapidly in the United States, and we are entering a period in which cases are likely to rise further,” says Robert Johnson, professor of finance at Creighton University in Omaha, Nebraska.
“I don’t believe that most leisure travelers are willing to get on airplanes and travel to theme parks in the near future, which will continue to have a deleterious effect on Disney earnings. Additionally, a further coronavirus outbreak may negatively impact the return of college basketball, which is a major driver of earnings for ESPN. While the vaccine news is certainly positive for the long run, the near term outlook for Disney is weak,” he says.
For long-term investors, Johnson says Disney is a strong core holding. In the short term, he believes it’s overvalued, selling at 54 times forward earnings.
While Disney is experiencing losses, Crosby says traders are interested in seeing more investment in additional properties even if it means taking a larger loss for the quarter.
While there is some indication of reopening in the second quarter of next year, Crosby says in the short term, there is a pessimistic outlook based on the headwinds of the larger business.
The long-term case still remains bullish, he adds. “This is due to the fact that there are very few companies that are the scale of Disney that can compete on so many different footings whether it’s the physical businesses or the digital properties they’re amassing,” Crosby says.
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