Disney provides largely the at-home, behind the screen experience. Still, the Coronavirus has rocked the stock, justifiably so.
Before we dive into the how and why, here are the facts.
The stock is down 37% from its all-time high hit in late 2019. That’s worse than the S&P 500’s decline from its all-time high of 25%.
The crux of the problem is that Disney’s theme parks business, which comprises a decent portion of revenue and earnings is closing down while the virus rages. Plus, Disney’s sports media business, like ESPN which airs across Disney’s traditional and streaming platforms, will see much lowered ad revenues, as sports have largely shut down.
Disney’s theme parks business will shut down for t least a month.
Earnings per share for 2020 is expected at $5.14, slightly down from 2019’s result, but revenue is still expected at $80.5 billion, still up from last year’s $69.5 billion, even amid the virus’ impact. Analysts haven’y moved much on estimates for the next year. The stock’s drop leaves it trading at 17 times next year’s expected earnings per share. That’s far lower than its 5-year high of 27 times.
The multiple may expand as analysts lower their earnings estimates. But taking a closer look at why the earnings are likely to fall should shed some light on why the stock is falling so much.
In a note to clients, Moffett Nathanson’s Michael Nathanson wrote, "we try to get ahead of the likely financial pain that Disney will face from the impact of varied negative headwinds caused directly by the COVID-19 virus.”
He lowered his price target to $120 from $165, as he lowered his 2020 earnings per share estimates by 40%, which seems to justify the stock price drop. He lowered his 2021 EPS estimates to $3.20 from $4.45 as well, still applying a substantial multiple to near-term earnings, indicating he believes in the company long-term. The lowered 2021 earnings should be scary to investors at large, as it indicates the potential economic recovery after the virus may be slow.
First off, the Parks business has bene shut down for a month. Nathanson says that would dent Parks revenue by 8% for the full year, or a 2% impact on total company revenue. But the parks business has fixed costs that can’t be ratcheted down easily in line with revenue, which will destroy the operating margin. The Parks business could lose 25% of its expected EBIT (earnings before interest and tax). That’s an 11% hit to total company EBIT.
Further, hundreds of millions of loss revenue dollars from the suspension of the NBA season, combined with lower advertising revenues in direct-to-consumer (Hulu, ESPN plus and others) will impact earnings materially as well.
So what do investors do now?
The stock could be a buy if a 40% reduction to 2020 earnings is the right reduction. But investors will have to see what the consensus numbers come to. Plus, if the return to growth in 2021 is slow, as Parks reopen slowly and retail shoppers remain traumatized, pressuring ad revenues, this may not be the time to buy.
The broader market continues to grapple with the impact of the virus.
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