COVID-19 Crippled Disney’s Empire — Is the Stock Still a Buy?

Earlier than the pandemic, Disney (NYSE:DIS) theme parks have been prospering, and streaming companies equivalent to Disney+ have been experiencing large subscriber features.

Nevertheless, the shutdowns have dramatically decreased income and left the corporate enjoying protection. The inventory has risen over 25% prior to now three months regardless of these situations. Nonetheless, merely reopening the theme parks doesn’t imply guests will come flocking again, and with no readability on when all components of the enterprise can resume their full operations, buyers may start to marvel if the inventory is due for one more coronavirus-related sell-off.

Preliminary results of the pandemic

COVID-19 struck on the coronary heart of two of Disney’s divisions. First, the parks, experiences, and merchandise phase noticed all theme parks and cruises shut down when the world went into lockdown. This occurred first with Shanghai Disney and Hong Kong Disneyland in January. By mid-March, it affected all parks. The corporate additionally canceled its cruises at across the similar time. In consequence, income on this phase fell 85% 12 months over 12 months within the fiscal third quarter.

One other division, studio leisure, noticed its enterprise nosedive as effectively. With few film theaters open, the corporate didn’t have theatrical releases to generate receipts, and income fell 55% within the newest quarter.

This led to a number of strikes from administration to protect liquidity. The corporate issued $6 billion in new long-term debt throughout the quarter, in addition to a further $925 million after the quarter ended. Disney additionally closed on a $5 billion, 364-day credit score facility. 

To the shock of many shareholders, Disney even suspended its dividend for not less than the primary half of the 12 months. That transfer saves Disney about $1.6 billion. At an annual payout of $1.76 per share, the dividend is prone to exceed full-year earnings for this fiscal 12 months, which analysts estimate at $1.60 per share.

A roller coaster at a theme park.

Picture supply: Getty Photos.

Streaming, a part of the direct-to-consumer and worldwide phase, turned the silver lining for Disney throughout the lockdowns. Clients flocked to the brand new Disney+ streaming service, taking its subscription numbers to 57.5 million by the tip of the fiscal third quarter. ESPN+ additionally noticed its subscriber numbers greater than triple from year-ago ranges regardless of an absence of reside sports activities.

Nevertheless, even with such strong subscriber progress, total income fell 42% 12 months over 12 months throughout the quarter, and earnings per share was down 94%.

Disney inventory amid COVID-19

Nonetheless, Disney inventory has fared significantly better than third-quarter earnings may point out. 12 months thus far, the inventory has misplaced about 10% of its worth. Like most firms, Disney inventory noticed a large sell-off in February and March earlier than steadily recovering. This months-long rally has taken the price-to-earnings valuation to roughly 44. 

Sadly, this restoration might dampen the enchantment of Disney inventory within the close to time period. For all the speak about Disney+, theme parks and the field workplace stay essential money cows that made up over half of the highest line in fiscal 2019.

Early makes an attempt to reopen theme parks have proven that the phase will want months (if not longer) to bounce again as long as COVID-19 weighs on shoppers’ minds. Disney Cruise Line has repeatedly delayed its relaunch, this time by means of Oct. 31 on the earliest. Moreover, film theaters are nonetheless forgoing main film debuts. As a substitute of a theatrical launch, Disney will launch its potential blockbuster Mulan on Disney+ in September for a further payment.

Ought to buyers purchase?

The COVID-19 disaster may not undermine the long-term case for Disney inventory. Sooner or later, society will be taught to handle the illness, and buyer demand for journey and leisure will return. Nevertheless, buyers have already priced that return to regular into the inventory, given its shrinking year-to-date losses. This rally is occurring at a time when Disney can not decide to any reopening dates, and with a lot uncertainty, potential buyers might balk at paying practically 50 occasions earnings (or triple digits if taking a look at ahead earnings estimates).

The corporate can have no downside staying afloat throughout the pandemic, however till massive swaths of its enterprise can resume their regular operations, buyers ought to keep on the sidelines.

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