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Earnings

Will park closures prove fatal for Disney’s share price?

The Walt Disney Company’s [DIS] share price has gained just under 7% for the past three months, failing to keep up with the S&P 500’s gains of 11% in the same period. The share price has fallen by over 21% from the start of the year to 31 July.

As a result, Disney’s share price has struggled to return to its pre-pandemic levels as its sports entertainment, cinema and parks businesses continue to feel the effect of the virus.

Bob Chapek, Disney’s CEO, said during the company’s second-quarter earnings in May that it was still too early to tell when it would resume all of its operations but that it has been working on an approach.

While Disney hoped that its Major League Baseball games would be up and running at its Florida venue this month, a spike in infections among players has meant that multiple games have already been cancelled – more bad news for Disney’s share price investors.

Some are worried the entire season could be scrapped, including some promised NBA games that were expected to resume last week. The news sent Disney’s share price down by 1.1% last Monday (27 July).

How will the combined impact affect investor and trader sentiment around Disney’s third-quarter results on Tuesday (4 August)?

 

 

Park revenues see biggest fall in Q2

In the company’s second-quarter earnings, Disney suspended its dividend payout for the first half of the fiscal year after reporting mixed results.

Its Parks, Experiences and Products segment took the biggest hit, posting revenues of $5.54bn, down 10% from the same quarter in 2019. Meanwhile, its Media Networks segment was up 28%, Studio Entertainment by 18%, and — the company’s current bright spot — the Direct-to-Consumer and International segment up by over 100%.

$5.54billion

Revenue from Disney's Parks segment - a 10% YoY decline

 

Disney’s bosses have expressed hope that its Shanghai park would soon resume usual levels of business, given that it has been running at reduced capacity since 11 May. Its second park to reopen, Disneyland Hong Kong, however, closed its doors one month after restarting business.

Despite seeing positive news in some areas, Disney’s parks business has the most impact on the company as one of the company’s main revenue drivers. In 2019, this segment accounted for 37% of the company's sales.

 

Loss expected for Q3

For the third quarter, the entertainment company expects to post a quarterly loss of $0.43 per share, according to Zacks, which represents a year-over-year fall of 131.9%. Revenues are expected to be $12.65bn, down 37.5% from the same quarter in 2019.

Zacks states that the earnings estimates have been revised 62.5% lower over the last 30 days.

Given that the quarter includes April through to June — the period where Disney took the biggest hit to its business as a result of the pandemic — few expect strong results. Despite the bearish outlook, many will be paying attention to what Disney has planned for the future.

$12.65billion

Disney's expected Q3 revenue - a 37.5% YoY decline

 

Looking at the full year, Zacks has a consensus estimate for earnings of $1.38 per share and revenue of $66.96bn by the end of 2020. This represents falls of 76.08% and 3.75%, respectively, from 2019.

 

A torn outlook

The current consensus recommendation among 26 analysts polled by CNN Business is split, with 12 recommending to buy the stock and 12 suggesting to hold. The entertainment company has seen some recent downward revisions, too.

Earlier this month Doug Creutz, an analyst at Cowen & Co, lowered his rating on the stock from outperform to perform and cut his share price target to $97 from $101. Creutz made the rating change because he believes there will be “prolonged impact” from the pandemic on the company, with its parks and cinema segments not expected to recover until 2021.

Elsewhere, some analysts believe that Disney is currently being undervalued. Brett Feldman, an analyst at Goldman Sachs, says that Disney’s streaming service is underappreciated at the moment, even though it is “rapidly emerging as a global leader in direct-to-consumer entertainment”.

Feldman says that the market values Disney+ at a 50-60% discount compared to Netflix [NFLX], a gap that will close as the streamer “approaches Netflix-like scale and economics over the next five years”. He holds a buy rating on the stock with a $137 share price target.

Meanwhile, Jessica Reif Ehrlich, an analyst at BofA Merrill Lynch, argues that the stock is undervalued by nearly 30%. She holds a buy rating and a $146 target on Disney’s share price.

 

Market Cap$210.611bn
PE ratio (TTM)39.28
EPS (TTM)2.97
Quarterly Revenue Growth (YoY)20.7%

Disney share price vitals, Yahoo Finance, 3 August 2020

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