Disney stock has gotten a downgrade from “buy” to “neutral” by Wall Street analyst Michael Nathanson, who had long been bullish on the media giant’s shares.
“There are a number of risks” to the company from COVID-19, the MoffettNathanson partner wrote in a note to clients, “that could lead this unprecedented event to have a longer impact.” He also trimmed his 12-month price target to $112 from $120.
On Tuesday afternoon, Disney will report financial results for its fiscal second quarter, which ended March 31. Its stock began the week at $105.50, well off its 52-week high of $153.41 established last year. Shares had changed hands at more than $140 for months until the pandemic took its toll in March. They have found a base just above $100 over the past month as small glimpses of optimism were seen and some global regions began to reopen.
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Disney has been among the hardest-hit entertainment companies during the pandemic. Its lucrative theme parks, cruise lines and hotels all shut down, theatrical movie releases from its industry-leading studio have been halted and its sports powerhouse ESPN has been unable to broadcast any games. Beyond those obvious impairments, Nathanson sees a predicted rise in cord-cutting and softness in TV advertising also hurting free cash flow. Streaming success with Hulu and fast-starting Disney+ — which Nathanson sees having 76 million subscribers by fiscal 2021, years ahead of schedule, has been a major positive. It won’t offset the other losses, however.
“The core issue for Disney is not that their future isn’t well protected, it is that the fallout from the COVID-19 pandemic is incredibly harmful to their near and mid-term financials,” the analyst wrote.
Disney’s parks should reopen by July 1, Nathanson estimates, though that’s an optimistic timeline given the uncertainty about public spaces and still-evolving health protocols. Even once the gates swing open, though, there is likely to be a hangover from the months of closure as well as the broader economic meltdown, which has quickly forced tens of millions in the U.S. into unemployment.
“We believe that investors are underestimating the lagging recovery nature of Disney’s theme parks,” Nathanson wrote. “Looking at prior recessions, the revenue trough occurs in the latter part of the economic downturn as consumers become more reluctant to make large discretionary expenditures. It is
lagging because vacations that have been booked in advance of a recession are usually not cancelled. However, we don’t know if looser cancellation policies today at Disney will impact the parks even earlier this time around.”
The company’s Media Networks division will be hurt by worsening cord-cutting trends, Nathanson believes. Thus far in earnings season, major pay-TV providers have announced subscriber losses of 1.6 million, which is about 270,000 more losses than Nathanson had forecast.
At the film studio, a pivotal title is Mulan. The live-action movie is dated for July 24, having slipped back from March. Even if it keeps that date — a big if — “it is likely to be less than a historical
blockbuster if it is released in July,” Nathanson wrote.
“We would expect Disney to continue to be aggressive with its post-theatrical windowing strategies, especially if Mulan underperforms at the box office. This could mean further experimenting with PVOD as well as bringing the movie to Disney+ a lot sooner than it would under more normal circumstances, like Onward and more recently, Star Wars: The Rise of Skywalker.”
The company has “all the incentive” to move Mulan up and slot it as a premium-priced streaming title, Nathanson added.
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