Disney reports with parks closed outside of China, sports sidelined
Media giant and theme park operator Disney (DIS) is scheduled to report results of its second fiscal quarter after the market close on Tuesday, May 5, with a conference call scheduled for 4:30 pm ET. What to watch:
1. DISNEY+: In November of last year, Disney launched its streaming service, Disney+, in the U.S., Canada, and The Netherlands.
In its last quarterly report, Disney reported 26.5M paid subscribers for Disney+ as of Dec. 28, 2019. As of that date, ESPN+ had 6.6M paid subscribers and total Hulu had 30.4M paid subscribers, including 27.2M SVOD only subscribers. "We had a strong first quarter, highlighted by the launch of Disney+, which has exceeded even our greatest expectations. Thanks to our incredible collection of brands, outstanding content from our creative engines and state-of-the-art technology, we believe our direct-to-consumer services, including Disney+, ESPN+ and Hulu, position us well for continued growth in today's dynamic media environment," said Robert Iger along with the company's earnings.
In March, Disney launched Disney+ in markets across Western Europe - including the UK, Ireland, France, Germany, Italy, Spain, Austria, and Switzerland.
On April 8, Disney+ reported that it had reached 50M paid subscribers globally within five months after its U.S. launch.
Following that announcement of 50M global subscribers, Rosenblatt analyst Bernie McTernan said the streaming service continued to demonstrate that it is well on its way to become a dominant global streaming player for the long term. The announcement suggests Disney+ could reach nearly 70M subscribers by the end of June, according to the analyst, who made no change to his Buy rating on Disney shares.
Credit Suisse analyst Douglas Mitchelson noted that of those 50M paid subscribers, about 42M of those came from North America/Western Europe markets and about 8M from India. Thus, Disney+ added 14M developed market subscribers from the last reported February 4th 28M subscriber count through April 7th, reaching a level he did not expect until the end of the June quarter.
2. PARKS CLOSED, FILM MAKING HALTED AMID CORONAVIRUS: In January, Disney's Shanghai Disney resorted closed to combat the spread of the coronavirus in China. In early March, Disney's Shanghai Disneyland began resuming a limited number of resort operations as the growth in coronavirus infections in the region slowed. Certain facilities at Disneytown, Wishing Star Park and the Shanghai Disneyland Hotel started operating with limited capacity and at reduced hours, according to reports at the time.
On March 12, Disney announced the closure of Disneyland Park and Disney California Adventure Park, beginning the morning of March 14.
On March 19, Disney stated in a regulatory filing, "The impact of the novel coronavirus, or COVID-19, and measures to prevent its spread are affecting our businesses in a number of ways. We have closed our theme parks; suspended our cruises and theatrical shows; delayed theatrical distribution of films both domestically and internationally; and experienced supply chain disruption and ad sales impacts. In addition there has been a disruption in creation and availability of content we rely on for our various distribution paths, including most significantly the cancellation of certain sports events and the shutting down of production of most film and television content. We expect the ultimate significance of the impact of these disruptions, including the extent of their adverse impact on our financial and operational results, will be dictated by the length of time that such disruptions continue which will, in turn, depend on the currently unknowable duration of the COVID-19 pandemic and the impact of governmental regulations that might be imposed in response to the pandemic."
On March 27, Disney issued a notice that stated: "As a result of this unprecedented pandemic and in line with direction provided by health experts and government officials, Disneyland Resort and Walt Disney World Resort will remain closed until further notice. The Walt Disney Company has been paying its cast members since the closure of the parks, and in light of this ongoing and increasingly complex crisis, we have made the decision to extend paying hourly parks and resorts cast members through April 18."
3. DOWNGRADES: On May 4, MoffettNathanson analyst Michael Nathanson downgraded Disney to Neutral from Buy with a price target of $112, down from $120. Disney has "advantaged assets to win" in the new world created by COVID-19, but the uncertainty of the present situation creates "significant and unrivaled earnings risk for the foreseeable future," Nathanson told investors. The economic impact of social distancing is most severe for the two divisions, Theme Parks and Studio Entertainment, that have driven Disney's free cash flow in the recent term, added the analyst.
On April 20, both UBS and Credit Suisse downgraded the stock as well. UBS analyst John Hodulik downgraded Disney to Neutral from Buy with a price target of $114, down from $162. The analyst noted that the COVID-19 outbreak is impacting every one of Disney's segments, with Parks being hit the hardest. Hodulik now expects Disney to post $1.60 of earnings per share in fiscal 2020, down from his prior forecast of $3.08, and $2.13 in fiscal 2021, down from the $5.87 he had previously expected. Further, the analyst believes Parks' profitability "will be impaired for a longer period of time" given the lingering effects of the outbreak. The economic recession plus the need for social distancing, new health precautions, the lack of travel and crowd aversion are likely to make this business less profitable until there is a widely available vaccine, he contended.
Voicing similar concerns, Credit Suisse analyst Douglas Mitchelson downgraded Disney to Neutral from Outperform with a price target of $116, down from $140. Streaming value creation should easily outstrip linear TV declines, and Mitchelson expects a full rebound in theme park and Hollywood operations over time. However, near- to mid-term the analyst expects Disney will remain in a narrower trading range given a remarkable lack of operational visibility, expected severe cuts coming to Street estimates, and a now more equally balanced mix of positive and negative catalysts.
Earlier in April, Wells Fargo analyst Steven Cahall downgraded Disney to Equal Weight from Overweight with a price target of $107, down from $155. The analyst still believes Disney+ can offset a declining environment for Media Networks, but is concerned by this "unique and severe downturn for Parks." Cahall forecasts zero park attendance for the second half of FY20 and roughly 50% capacity in FY21. The analyst cut his Disney target enterprise value by 26%, or $87B, which includes a $65B cut at Parks.
4. CONSENSUS: In terms of overall results for the second quarter, analysts are calling for Disney to report total revenue of $17.81B. The consensus Q2 EPS forecast stands at 88c, down from $1.39, where it stood 90 days ago. For the June-end quarter, analysts' consensus currently calls for revenue to decline to $14.37B and for the "House of Mouse" to post a loss of 6c per share.
5. CHANGE AT THE TOP...OR WAS THERE?: On February 25, Disney announced that Bob Chapek - who most recently served as Chairman of Disney Parks, Experiences and Products - had been named CEO of The Walt Disney Company, effective immediately. Robert Iger assumed the role of executive chairman and will direct the company's creative endeavors, while "providing the full benefit of his experience, leadership and guidance to ensure a smooth and successful transition" until his contract ends on Dec. 31, 2021, the company said at the time.
On April 13, The New York Times' Ben Smith reported that after handing over the reins to Chapek, Bob Iger effectively returned to run Disney in March as the coronavirus pandemic decimated its most profitable businesses. Iger is now intensely focused on remaking a company that will emerge deeply changed by the crisis, said the report.