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Why Disney Stock Deserves The Attention Of New Buyers Amid Coronavirus Pandemic - Seeking Alpha
Quarterly profits are down 91%. Operating income for parks and cruises dropped 58%. The stock has been downgraded to a sell. ESPN will recover quickly but parks may not. Marvel, Disney+, Disney brand will remain strong.
Disney (DIS) has released its latest earnings and whilst its stock price remains largely unwavered (at the time of writing, the price is actually higher than pre-earnings), the company has taken hits from all angles due to Covid-19.With its theme parks being shut, films on hiatus and sports being postponed, Coronavirus has taken a serious toll on Disney. Consequently, analysts are downgrading the company to a sell. However, for long-term investors, a battered Disney stock price might just be worth their attention. Quarterly Earnings In Disney's Q2 earnings, the company reported rather shocking (albeit somewhat expected) results. EPS came in at 60 cents vs 86 cents expected. Whilst revenue beat slightly at $18.01 billion vs $17.68 billion, operating profits were down a whopping 91%. Disney effectively missed out on $1.4 billion compared to last year. Revenue from Disney's Parks, Experiences and Products including cruises only declined 10% but operating profits from these segments declined a staggering 58%. Expenditure during the Coronavirus pandemic were a large contributing factor in these figures. The net cost of pay to employees who were not performing services as a result of actions taken in response to COVID-19, and inflation, the company said in its earnings report. Disney's studio entertainment segment actually reported an increase of 18% in revenue to $2.54 billion but delayed releases of films including Mulan, The New Mutants and Black Widow undoubtedly caused the figure to be lower than it should be. Operating income in the segment also dropped 13% to $466 million. Although ESPN saw an 8% decline due to all live sports being cancelled, cable network revenues on the whole increased 17% to $4.4 billion and operating income increased 1% to $1.8 billion. "The increase in operating income was due to the consolidation of TFCF businesses (primarily the FX and National Geographic networks), partially offset by a decrease at ESPN, and to a lesser extent, the Domestic Disney Channels and Freeform," the company said. Disney+ was the company's highlight for the quarter, adding 4.5 million since April 8, bringing total subscriber numbers to 54.5 million. The Happiest Place on Earth Disney's theme parks, experiences and products contribute the highest amount of revenue among its segments. Last year, the segment generated 36% of the company's revenue. Disney's 2019 revenue data Source: Statistica Disney theme parks around the world closed on March 12 due to the Coronavirus and whilst there are talks about reopening them, their immediate future looks troubling. As costs continue to be incurred from developments (eg Star Wars: Galaxy's Edge) and furlough, serious revenue generation from the park seems to be far, far away. Vaccines for Covid-19 are not expected to be available until 2021. Whilst governments will begin to ease lockdowns, people will still remain cautious until a vaccine is available. This means that social distancing will most likely become the norm and establishments that thrive on mass gatherings will suffer. Easing of lockdowns may enable Disney theme parks to reopen but it is highly unlikely that the parks will receive the same footfall as before until there is a proven vaccine. Shanghai Disneyland is set to open on May 11. Now that China's lockdowns have been removed, normality is being restored to the society. The optimistic analyst would consider the success/failure of Shanghai Disneyland as a measure for how other Disneylands will perform. However, using Shanghai Disneyland as a model for projection may be a tad short sighted. Although Wuhan's lockdown lasted 76 days, lockdown measures in Shanghai "lasted a bit more than three weeks and most people were always free to leave their homes." America has been locked down since mid-end of March and remains reluctant to ease restrictions any time soon. The mentality of theme-park goers who have been in locked down for three weeks is very different to those who have been locked down for considerably longer. Worse still, if Shanghai Disneyland proves to be unpopular post-lockdown, the other Disneylands will have even less hope of success. Whilst Disney execs hope to open Disney World in USA on 1 June, the date "is far from guaranteed." Meanwhile, Tokyo Disneyland is looking at reopening post-May, Paris is looking at September and Hong Kong is still unknown. Societal behaviour will realistically result in fewer people visiting the parks even when they open, at least for the foreseeable future. Yes, there are many in America who don't buy into the pandemic and are already calling for lockdowns to be eased, but the majority who believe in the dangers of Covid-19 will continue to social distance until there is a vaccine. More importantly America went from a 50-year-low unemployment of 4.4% in March to what experts believe is now 20%. Trips to Disneyland parks are far from cheap. An Adult 1-Day Park Hopper Ticket will cost you $159 in California, whilst an entry to Florida's park costs from $109. With unemployment spiking, it is unlikely that people will be splashing out money on holidays just because the parks have reopened. The same goes for the world outside of America - unemployment and consequent frugality coupled with health fears will deter people from going to theme parks, especially the most expensive ones. Investors should be seriously concerned about the near future of Disney's parks. However, looking past the virus pandemic and even past the recovery period, Disney will continue to offer one of the best family holiday packages. Since 2009, revenue from Disney's theme park segment has seen continuous growth, suggesting that interest in the happiest place on earth is increasing. When 'normality' returns, even if that includes some sort of social restriction measures, fans will also return to Disney's theme parks. Disney, Marvel and Star Wars fans will continue to be drawn into Disney's unparalleled real-life fantasy. Revenue of The Walt Disney Company's parks and resorts segment worldwide from 2008 to 2018 (in billion U.S. dollars) - Source: Statista On-screen entertainment Whilst the outlook of Disney's theme parks may seem bleak, Disney's ability to bring entertainment to our living rooms has much greater potential. Its media networks (ABC, FX, Fox, ESPN, Disney Channel) are thriving and ESPN will bounce back stronger when sports resume. Taking away Americans' rights to watch live sports is even more controversial than taking away their gun rights [statement not to be taken literally]. Once the sporting seasons return, sports fans will focus all of their attention on live sports. Even mild sports fans may consider jumping aboard after being deprived of sports for such a long period. Disney's studios will also bounce back strongly. Whilst its biggest 2020 blockbusters have been put on hold, they can largely be regarded as deferred revenue. Perhaps cinemas may need to introduce social distancing measures and perhaps reluctance to even go to the cinema may linger when lockdowns are lifted, but interest in Disney's high production films will not diminish. 20th Century Studios, Marvel and Lucasfilms produce some of the highest grossing films in the industry and this should only excite investors. Disney+ also has a great deal of potential. Not only is it giving Netflix (NFLX) a run for its money ($6.99 vs $8.99 per month), it is also stripping it of blockbuster content such as the Star Wars franchise, the Marvel universe and the world of Pixar. Even after lockdown and people begin engage in activities outside their living room, Disney content will still be almost essential for any TV set. In the long run, Disney's on-screen entertainment will continue to make investors money. So is Disney a buy? At $104, Disney is far from its all time high of $151 from November 2019. Having said that, it is also far from its March 2020 low of $86. The last time Disney stock was in the $80 range was 2015. The damage Covid-19 has done on Disney's theme parks will require investors to be patient in waiting for the company to bounce back to its prime. Even with at-home content thriving, impacted revenue figures from theme parks will continue to hurt the company, at least for the foreseeable future. In this sense, expect Disney's stock price to undergo more damage. Some might argue that the March lows already baked in the damage of Coronavirus and whilst this may be true, the extent of the damage and the extent of its duration as shown by recent earnings may not be reflected in its current price. If and when Disney's stock price edges towards the 90s and hopefully 80s, new investors who are looking for long term opportunities should seriously consider adding the company to their portfolio. Disney's theme parks will suffer for now but true long-term investors will recognise that the happiest place on earth will eventually turn that frown upside down. Additionally, Disney's ownership of sports streaming and blockbuster franchises provides guaranteed cash in the pocket in the future. For these investors, sit tight for now, the worst is yet to come. For those already invested in Disney and need cash soon, profits are probably better off in your pocket than with the company right now. In any case, investors should keep this stock in their watchlist and eagerly wait for a discounted buying opportunity. Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.