Disney Sickness Considerably Worse Than Expected
Disney just got a check-up and they are even sicker than we thought. They missed their earnings expectations by a mile and have seen their profits decline by 93%.
Disney is not a company that does well in seclusion, and many of the things that they make us think of, their theme parks and their movies in particular, are not things that this company can just set aside and expect to not be gasping for air.
It is therefore no surprise to anyone that this company has taken a huge hit to their business from our lockdown. Some companies such as Amazon and Netflix have thrived during this time, and while Disney isn’t on the far end of this like the airlines and cruise lines are, they are pretty close.
Disney stock took the obligatory plunge that virtually all stocks were thrown into when the bear started to roar back in February. While they gave back 39% during their fall, from the time the market plunged to when it bounced, which wasn’t all that much more than the market fell, what’s happened since is where this stock really showed its company’s damage.
There are plenty of folks who remain very bullish on Disney longer-term, and are confident it will recover and presents value at these depressed prices, but investors just aren’t putting their money where their mouths are.
With stock markets on a tear since Disney bottomed, with the damage mostly repaired and the Nasdaq up for the year now, Disney is still down 30% on the year. The bears haven’t gone into hibernation, they’ve gone to Disneyland.
Disney Just Saw the Lights Dim a Lot More
The fact that we now know that Disney’s profits are down 93% year over year is not exactly going to inspire any confidence in this stock right now. A drop that big isn’t even that easy to get your head around, it’s that massive.
Sure, their theme parks are closed, and people stopped going to the movies, but who would have thought things at Disney could be this bad? There’s even a bright light from this, the success of their streaming service, Disney +, which, unlike their other businesses, thrives in quarantine.
Unfortunately, in spite of hitting the 50 million subscriber mark this early in its evolution, it is not a source of profit to offset what they lost with other projects, it instead adds a lot of red to Disney’s balance sheet due to its high start-up costs, and lost $812 million last quarter.
Disney’s broadcast properties have not suffered from neglect either, but everyone’s making less money from advertising these days, Disney included. Among their channels is ESPN, and we know what’s happened to sports.
Still though, broadcast divisions at least pulled their weight, and actually saw their revenue increase. Disney’s overall revenues met expectations, but their earnings per share didn’t come close. This is no time to be disappointing the street by this much.
Earnings from this quarter last year came in at $3.55 per share. Analysts factored in the amount of pain that they thought that the company was in by reducing this to a prediction of 68 cents a share. Disney only showed them 26 cents.
Disney Not Tumbling in After Hours Trading is a Good Sign
These are the kind of results that normally would send a stock reeling, although Disney seems to be showing some resilience and may manage to stay well above their lows from late March, when they barely stayed above $80. Staying above $100 might be off the table for a little while, but this is the area that some investors have been saying is where the value line is, and this may keep things from getting even worse.
Some suggest that things are going to get even worse next quarter. That’s even hard to imagine, but it’s certainly possible and maybe even probable. While we are opening things up more, the things that Disney needs to get well, events that bring together large groups of people in proximity, are at the end of the lineup to be let back in, to be sure.
Disney is even withholding dividends this time around, which is not just sensible, it is wise and necessary, even though there is a certain segment among investors that are going to be made pretty unhappy from this. The hope is that they will take the attitude of we’re all in this together and stay the course, but if not, this will add to the downward pressure on this stock. There is bound to be at least some damage here.
Even though the stock may be hurt a little by this, the company will certainly be helped, especially with cash reserves shrinking. They don’t want to be handing out the rent money just to appease this minority. Pocketing the $1.6 billion instead of giving it away won’t help a lot, but it will help and this company is in need of all the help it can get now.
CFO Christine McCarthy specifically cited the need to preserve cash in the coming months as the reason for eliminating the dividend. They still have $14.3 billion on hand, but they also borrowed an additional $6 billion just since the beginning of April, and their cash position is like a float at the top of a tank of water that is seeing its level sinking.
Disney’s new CEO, Bob Chapek, tried to reassure investors by telling them that “we are confident in our ability to withstand this disruption and emerge from it in a strong position. Disney has repeatedly shown that it is exceptionally resilient, bolstered by the quality of our storytelling and the strong affinity consumers have for our brands, which is evident in the extraordinary response to Disney+ since its launch last November.”
There is little question that the company will resume its success, although the real question is what happens in the meantime. As Disney’s ad revenues start to pick up more, which will be underway soon, this will at least serve to cushion the blow.
Disney will very likely be fine. We only have to wonder about whether we want to be hanging around while they are this sick in bed, but the time will come where this stock does become a good value, when we’re ready to move on it like we have with the market in general. Stay tuned.
Editor, MarketReview.com
Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.
Contact Andrew: andrew@marketreview.com
Areas of interest: News & updates from the Consumer Financial Protection Bureau, Trading, Cryptocurrency, Portfolio Management & more.