Disney Recovers 45% But Will Not Reach Its Pre-Covid Level Anytime Soon

by Trefis Team
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We believe that Walt Disney stock (NYSE: DIS) may not be a good opportunity at the present time. DIS trades at $125 currently and is, in fact, down 14% so far this year (from $145 at the beginning of 2020). It traded at over $140 in February 2020 – just before the coronavirus pandemic hit the world – and is currently 14% below that level, as well. DIS stock has recovered 46% from its March lows of around $86. In comparison, the S&P 500 recovered 52% from its March bottom. The company’s streaming platform – Disney+ – is seeing healthy subscriber growth ever since its launch, which received a further boost during the pandemic. But with Disney’s traditional business segments like parks and resorts being severely affected by the pandemic induced lockdowns, Disney’s stock has underperformed the broader market over recent months. The uncertainty regarding the company’s media, studio, and parks businesses functioning to full capacity anytime soon, due to the recent surge in Covid positive cases in the US and Europe, coupled with a high debt burden, will prevent the company’s stock from seeing a major rise anytime soon. Our conclusion is based on our comparative analysis of Disney’s stock performance during the current financial crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 54% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how DIS stock and the broader market fared during the 2007-08 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

DIS and S&P500 Performance Over 2007-08 Financial Crisis

DIS stock halved from levels of about $35 in September 2007 (pre-crisis peak) to levels of $17 in March 2009 (as the markets bottomed out), implying DIS stock lost 52% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of close to $32 in early 2010, rising by 92% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% and recovered 48%.

DIS Fundamentals Over Recent Years

Disney’s revenues increased from $55.1 billion in 2017 to $69.6 billion in 2019 due to the acquisition of Fox and the consolidation of Hulu. Along with higher revenues, margins also increased with EPS rising from $5.73 in 2017 to $6.30 in 2019. The company’s Q3 revenues saw a 42% y-o-y decline, while the company reported losses due to lower revenue and higher interest burden.

Does DIS Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

DIS’ total debt increased sharply from $26.7 billion in 2017 to $64.4 billion at the end of Q3 2020 mainly due to debt raised to fund the acquisition of Fox. Its total cash shot up from $4 billion to $23 billion over the same period. DIS generated healthy cash from operation of close to $6 billion in the first nine months of 2020. The company has a high debt burden but the cash generation capacity will likely help it tide over the current crisis.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-November 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand, a decline in the number of new cases, and progress with vaccine development buoy market sentiment

Despite the recent surge in the number of new Covid-19 cases in the U.S., we expect continued improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 results, we believe Walt Disney stock has the potential for gains once fears surrounding the Covid outbreak are put to rest. That said, the company’s high debt burden and uncertainty around the revival of its parks and resorts business remains a significant risk factor to the realization of these gains. This could lead to Disney’s stock hovering around its current level of $125 at least in the near-term. Disney’s valuation by Trefis works out to about $125 per share.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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