Is Disney’s Stock Still Attractive After Recovering 37% In 2 Months?

by Trefis Team
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Disney’s stock (NYSE: DIS) has seen lot of movement so far this year – dropping by about 42%, from $148 at the beginning of 2020 to $86 as on 23rd March 2020, as growing fears around the coronavirus outbreak triggered a sell-off across global equity markets. But with the US government announcing a string of measures to keep businesses afloat, investor sentiment improved over recent weeks – helping Disney’s stock to recover 37% in the last two months to reach $118 as on 25th May 2020. Though the current stock price is still 20% lower than the level at the beginning of the year, we believe that Disney’s stock is likely to hover around the current level, with only a partial recovery achievable in the near term as the world still awaits the sign of abatement of the pandemic. Our dashboard What Factors Drove 12.9% Change In Walt Disney Stock Between 2017 And Now? provides the key numbers behind our thinking.

Some of the sharp stock price rise of the last 2 years is justified by the 26% growth seen in Disney’s revenues from 2017 to 2019, mainly due to the acquisition of Fox and consolidation of Hulu. This was partially offset by a 2.4% decline in net income margin from 16.3% in 2017 to 15.9% in 2019, due to acquisition-related expenses and higher interest expense. EPS grew by 9.9% from $5.73 in 2017 to $6.30 in 2019, as shares outstanding increased.

The rise in EPS was further accentuated by almost a 26% rise in Disney’s P/E multiple from 18.2x in 2017 to 23x in 2019. This was mainly due to the market expecting higher growth from the company following its acquisition of Fox and launch of its streaming offering Disney+ in late 2019. However, the P/E multiple fell in 2020 and is currently at 18.7x, which is still higher than its 2017 level of 18.2x. The drop in multiple in 2020 was due to the impact of coronavirus, which we explain below.

Effect of Coronavirus

With almost all major cities being locked down due to the spread of coronavirus, there has been a slowdown in economic and industrial activity. Disney’s stock is down 14.5% since January 31 after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 8.4%. The ongoing lock down of major cities and economic slowdown has adversely affected the company’s parks and resorts segment which has virtually seen a complete shutdown. Parks & Resorts segment has seen its share in Disney’s total revenue increase over the last 5 years, from 31% in 2014 to 38% in 2019, thus exacerbating the effect of the current crisis on the company’s top line. Additionally, lower spending power is also expected to lead to a drop in the company’s traditional media business and advertising income. With film shooting and releases being halted, the company’s studio business is expected to be adversely affected, with the acquisition of Fox not proving to be beneficial in 2020 so far.

With Q2 2020 (Jan to March) seeing only a partial effect of the lock down, we believe that the gravity of the situation could be reflected in sharp deterioration in performance of parks & resorts and media networks in Q3 2020. If there are no signs of containment of the virus in June 2020, Disney’s stock could face volatility around its Q3 results announcement, with the only saving grace for the company being Disney+ which has seen strong performance since its launch. If there are some signs of virus containment, the stock could see a marginal upside, with the market likely to wait slightly longer before we see a full recovery to January 2020 stock levels.

As per Disney valuation, we have a stock price estimate of $125 for Disney’s shares, slightly higher than its current market price of $118.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a more complete macro picture. It complements our analyses of Coronavirus impact on a diverse set of Disney’s peers like ViacomCBS. The complete set of coronavirus impact and timing analyses is available here.


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