Walt Disney Co. (DIS) $106.63

“Will the House of Mouse Crumble Down?”

April 19,2020

Walt Disney Co (DIS)Will the House of the Mouse Keep Crumbling Down? 

       “Around here…we don’t look backwards for very long. We keep moving forward, opening up new doors and doing new things.”-Walt Disney 

These are uncertain times. COVID 19 has closed schools, decimated businesses, and forced people into their homes. The World’s economy is taking a hard hit. From the Wall Street Journal on April 16, “The global economy has almost certainly entered a recession affecting most of the World, with a severity unmatched by anything aside from the Great Depression,” the International Monetary Fund said on Tuesday. People are being warned that now is not a time to invest in the stock market. “Economists anticipate an unprecedented drop of more than 30% in GDP for the 2020 2Q.” Another recent headline pointed out that “On March 20, 2020, stocks sank to their worst week since the financial crisis of 2008.” And for those who look at COVID 19 as a buying opportunity to pick up stocks at below fair value, there are some sectors that have been brought to their knees by this crippling virus, in industries such as travel, financials, restaurant, commercial real estate to name a few. Almost all companies have been affected either positively or negatively by the virus. Today I’m going to look at Disney.  

       Many people on Wall Street put a red flag up when talking about Disney. Their main businesses that bring in most of their revenue have been closed for over a month. Their theme parks, resorts and hotels, cruise ships, and retail stores have been shut down. There are no movie theatres open to bring in box office sales from the blockbuster movies they made. There have been no live sporting events, with many professional leagues and events being postponed or cancelled, thus their ESPN flagship network has brought in little in terms of  

advertising dollars.  All of this hit the company’s stock hard, with Disney hitting a 5-year low of $79.07 on March 18, 2020. It is down 28% year-to-date, while the S&P is only down 13% comparably. Further complicating matters for Disney is the uncertainty of when people will be able to leave their homes. And when they do, will they feel safe being amongst crowds of people? 

       There have been some positive signs over the past few days that has given Wall Street some hope. It appears in some countries and States that there has finally been a decline in the daily numbers of those who are contracting and dying from the virus. On another front, pharmaceutical companies Gilead Sciences and Johnson & Johnson seem to be putting out initial treatment to stop the virus. Disney is hoping that stay at home instructions will be lifted by June, and that families and young adults who have been pent up for months will come out in droves to be entertained by the company’s diverse offerings. I’m betting on Disney and feel that there will never be a better opportunity to gobble up their stock again. Don’t forget that 4 months before their 5-year low, Disney stock hit a 10-year high of $153.41, based on brand popularity, amazing box office sales, but also the birth of their streaming business, Disney+, which has far than exceeded expectations in such a short period of time. This is a big reason why Walt Disney Company has me going down, “The Road Less Travelled,” to a place, “Where Dreams Come True.”  

Disney+ 

       Just recently, Disney + streaming service surpassed 50 million subscribers. This came after launching it Just after Thanksgiving. It took Netflix over seven years to do this, and currently Disney+ boasts a third of market leader Netflix’s global subscribers. Bernie McTernan of Rosenblatt Securities believes Disney+ can reach 70 million subscribers by the end of June. They Just began service in India, the World’s most populated and largest growth market, and pulled in 8 million subscribers after 1 week. Disney+ has a much more reasonable subscription cost than Netflix, which bodes well for the company.  

       With further expansion expected in Western Europe later in the year, in addition to launches in Latin America and Japan, Disney is far ahead of schedule. Disney +’s bargain price of $6.99/month and $69.99/year is something people can afford. It’s expected to bring in an additional 3.5 billion in revenue a year, offering the company some much needed and highlighting the new segment’s importance. Former CEO Robert Iger recently said that, “company research shows consumer interest in Disney+ has bolstered the strength of the Disney brand overall.” 

Disney: A Top 20 Global Brand who remains financially strong 

       Don’t sweat Disney. It’s a diversified company who have power brands within its own power brand (ESPN, Star Wars, Marvel, ABC), and their theme parks, studios and media will all come back slowly but surely combining with their new streaming business. Morningstar distinguishes Disney as having a wide moat…they have such strong brand identity that they become hard to compete against. Warren Buffet considers this to be one of the most important qualities to look for in a company when investing in it. Disney also boasts a top-notch management team, and the new CEO, Bob Chapek, comes over from the parks business, so I see that as being promising given the social distancing World that we live in. Finally, I wouldn’t worry about 2Q earnings. Yes, the numbers most likely will look disappointing. My advice is once again to buy for cheap, then hold and be patient. Stocks typically bounce forward before the company’s financials go back to normal. 

       This past Tuesday, Moody’s said that Disney has enough cash flow to weather the disruption of the Coronavirus pandemic. “No change in rating or outlook (at this time). Liquidity reigns supreme,” SVP lead entertainment analyst Neil Begley wrote. With a 12.75B revolver capacity and a sizeable cash balance, Moody’s said the crisis will add between 6 months and a year to the time the company will need to return its balance sheet to credit metrics consistent with its current A2 long-term debt ratings. 

So, it looks like Disney can weather this catastrophic pandemic and walk away with their company and brand in tack. But what is still uncertain is when will stay-at-home measures be lifted, will the public feel safe to gather in large crowds, and what happens if the virus returns this fall? As of now, these questions have uncertain answers. This is what keeps everyone who is a part of the Disney Company up at night. My feelings are that things will slowly come back to normal, a new normal. One where contact targeting is being used to isolate and monitor those infected with the virus. One where there an emphasis on hygiene in our society, protecting people from contracting the virus. And one in which people will gather in large crowds because of strong safety measures implemented, ensuring a sense of protection from the virus. Our nation’s economy will desperately need public support, and Americans will answer the call. Let’s look at social distancing and its effect on Disney. 

The World Will Never Be the Same as We Know It 

     Yes, this is true to some degree. More people will be working remotely, seeing doctors and therapists from home and shopping for groceries and merchandise online. But when a vaccine, treatment, or “herd immunity,” is created, I see things going back to the old ways. A lot of people, especially younger ones, will throw caution to the wind and be shoulder to shoulder, front to back at theme parks and elsewhere. The only lasting human nature change I can possibly see is fewer handshakes amongst strangers. Yes, it may take a year or more for your Walt Disney experience to return to pre-Coronavirus times, but it will get there.  and that should leave patient investors confident. Here is what I see happening in the meantime. 

Theme Parks 

      Seeing that stay-at-home measures most likely will be lifted sometime around June, people will be biting at the bit to bust open their doors and be entertained. And Disney has a lot to offer. Their theme parks business will start off slow, because of fewer international visitors and allowing less visitors to enter the park at first. There will also be new safety precautions needed to be rolled out before the parks re-open. There will be temperature checking, spacing in lines for rides, hygiene kiosks installed, loading every other row, wiping down all rides before passengers can board them, removing many tables from their restaurants. These measures may appear obtrusive to potential park visitors. Another factor potentially affecting Disney’s theme parks attendance is the mass unemployment that COVID 19 has caused. More people will be unable to afford a trip to Disney’s theme parks. I feel that especially once Disney World and Disneyworld’s safety measures appear to be working, they will once again become a thriving contributor to the Disney Company. 

Studio  

     When the movie theatres re-open this summer, they may have to space seating out as a safety precaution, along with seats being wiped down before and after movie screenings. But Disney has an impressive catalog of probable blockbuster hits arriving to the screen the second half of this year and into February 2021. These include Jungle Cruise, Marvel The Eternals and Black Widow, West Side Story, and Mulan. Once again, as stay-at-home measures are listed, and treatments to fight and protect people from the virus are discovered, Disney’s studio business will return back to normal, because people are craving the experience of going to the movies more than ever. 

Live Sports 

     Finally, sometime this summer you should see the return of live sporting events, which would showcase Disney’s media offerings like ESPN and ABC Sports. This would bring back advertising dollars that are sorely being missed by the societal impact of the Coronavirus. Here is a list of sporting leagues and events expected to play or take place once social distancing measures are eased up. 

NBA, WNBA, NCAA, MLB, Champions League, U.S Open, LPGA Tour, PGA Tour, NFL and NFL Draft, NASCAR, U.F.C. 

There may not be fans allowed at these games or events, but there is enough activity here, as you can see, to bring in a lot of dollars into the media sector of Disney’s business.  

Final Analysis  

       Yes, there are uncertainties when looking at COVID 19 in terms of entertainment. When will people be able to leave their homes, and to do what? When will the American public warm up to gathering in big crowds? How many people will have excess money to go to the movies or visit Disney World? I believe if you block out the when will questions, and instead say we will be able to go to the movies and my family will take a trip to Disney World, The time to invest in Disney is now. It will never be this cheap to buy again. The stock currently sells at $106.63, after gaining 4.52% on Friday. Disney has an analyst price target of $132.55, with a high of $175.00 and a low of $100.00. 15 analysts have it as a buy, 7 as a hold, and 0 as a sell, according to Tip Ranks. There will be a vaccine for the Coronavirus. It may not be until 12-18 months. But when there is one, society will go back to normal. People will go to restaurants to eat, movie theatres to see films, and theme parks to vacation. Yes, I’m suggesting buying Disney now, but be a patient investor. There probably will be a bad 2Q earnings report. Sit through it. COVID 19’s end is not so far away. As a society, we are not designed to survive long term under the current conditions because we are social animals, albeit supposedly highly intelligent, logical and rational ones. Once this subsides, we will eventually revert to our preexisting norms and routines. Just as we did after SARS, MERS, avian flu, etc., we will after COVID 19.  

        Bob Iger, executive chairman of Walt Disney, says management are optimists but realists. “This is the biggest challenge of his career by far,” he says,” but when it’s over, people will want to escape maybe in ways they will appreciate more than they ever have.” I couldn’t agree with him more! 

Disclaimer: This material should not be considered investment advice. After Further Review…The Stock is Reversed or Bob Schless are not registered investment advisors. Under no circumstances should any content from this blog, website, articles, videos, seminars or emails from After Further Review…The Stock is Reversed or Bob Schless should be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.  

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