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Earnings

Will the coronavirus impact Disney’s share price momentum as earnings loom?

Just last quarter, Disney [DIS] looked unstoppable as the strong performance of its newly-launched streaming platform Disney+ pushed its share price to new highs. The share price rose a total of 33% for the year as a result of its new initiative and hit an all-time high of $153.41 shortly after reporting Q4 figures in November.

One month into 2020, however, and the company’s share price climb has been stopped in its tracks by the coronavirus. This may impact how Disney’s Q1 earnings results, which are reported on 4 February, will be received, as well as the company’s outlook for the year.

 

 

 

Why would the coronavirus impact Disney?

The coronavirus has infected hundreds of people since December following an outbreak in Wuhan, China. The quick pace at which the virus is spreading has alarmed international communities and caused markets around the world to dive. Between Friday 24 January and Monday 27 January, the S&P 500 dropped by 1.4%, and the FTSE 100 and Nasdaq both saw price dips of 2.3%.

As the Chinese authorities begin to restrict movement of more than 40 million people to limit the spread of the virus, businesses placed within these areas will be heavily impacted. In Disney’s case, it has had to temporarily close its Shanghai Disney Resort and Hong Kong Disneyland Resort during the Lunar New Year – a major holiday in the region, meaning that the company is unlikely to profit from this as it normally would.

Disney’s share price fell 3% on 27 January after JP Morgan analyst Alexia Quadrani warned of the pressure these closures would add to the company’s earnings for 2020.

“We note the closure comes at a lucrative and peak travel time to celebrate Lunar New Year… and the Holiday season extends into February,” she says.

“We also see a potential impact to Disney’s Studio business as theaters across most of the country have been closed, which if still in effect, would impact the anticipated release of Mulan in March.”

“We also see a potential impact to Disney’s Studio business as theaters across most of the country have been closed, which if still in effect, would impact the anticipated release of Mulan in March” - JP Morgan analyst Alexia Quadrani

 

Theme parks are a key element of Disney's business. Its parks, experiences, and products division generated about 38% of its total revenue and 45% of its profits in 2019.

 

What can we learn from Q4?

When Disney reported Q4 earnings in November 2019, it beat both top and bottom lines. Revenue came in at $19.1bn versus the $19.04 expected. Meanwhile, earnings per share hit $1.07 versus $0.95 expected.

However, what really allowed the company’s share price to climb to new highs was news of the strong performance of Disney+. On 26 November, Apptopia issued a report estimating that the streaming service reached 15.5 million downloads. While these figures do not confirm how many subscribers Disney+ has, it does suggest that Disney is potentially outpacing its goal of amassing 10-18 million subscribers in its first full year. Disney+, therefore, may well be the key to getting Disney’s share price to edge upwards around its Q1 earnings announcement, despite recent troubles.

 

Market Cap$249.686bn
PE ratio (TTM)20.84
EPS (TTM)6.64
Operating Margin (TTM)17.18%

Disney share price vitals, Yahoo Finance, 03 February 2020

 

What’s expected in Q1?

Zacks Equity Research reports that Disney is expected to deliver a year-over-year decline in earnings on higher revenues for Q1. Despite this, if these key figures top expectations in the upcoming earnings report, near-term share price performance is expected to rise, according to the firm.

Quarterly earnings are expected to come in at $1.43 per share, which would represent a year-on-year change of -22.3%, the analysis firm says.

It is important to note that an earnings beat may not be the sole basis for the share price moving higher or lower of course. Disney’s outlook as a result of the coronavirus, for example, may also persuade investors next week. Although the true impact of recent events is unlikely to show until subsequent earnings reports, comments on how the company is going to deal with the impact will be key this February.

 

Analyst view

Despite her prior warnings, Quadrani believes that the success of Disney’s direct-to-consumer offering, including that of Disney+, Hulu and ESPN+, will mean that news of the coronavirus will not have considerable impact in the near term.

“While there is little question these events will lead to some downward pressure on earnings, the magnitude of the revision is not likely to be sizable relative to the overall company’s earnings nor does it detract from investors’ main focus right now, which is the likely outsized success of Disney’s DTC initiatives,” she said.

“While there is little question these events will lead to some downward pressure on earnings, the magnitude of the revision is not likely to be sizable relative to the overall company’s earnings nor does it detract from investors’ main focus right now, which is the likely outsized success of Disney’s DTC initiatives” - JP Morgan analyst Alexia Quadrani

 

Rick Munarriz, writing for the Motley Fool and who owns shares of Walt Disney, is less optimistic. He says that the impact on Disney’s theme parks could be extensive. With incidents of coronavirus also reported in the US, he says that Disney resorts in California could also be affected as more people attempt to avoid crowded spaces on news of the virus. Combined with the fact that Shanghai, Hong Kong and California resorts were already suffering from slowing attendance, he says “this current quarter is going to be a challenging one for Disney”.

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