Are Disney Layoffs a Signal to Lay off the Stock?

Last week Walt Disney (NYSE:DIS) announced that it will lay off 32,000 employees due to the ongoing effects of the COVID-19 pandemic on its theme park business. This marked a 4,000 worker increase on the company's previously announced layoff plans and highlighted worsening conditions for one of the company's core operations.

Workforce reductions have been commonplace in the travel and leisure industry this year as the spread of the coronavirus has crippled consumer demand for high-risk (or closed) entertainment venues. But to see such a stalwart, global icon like Disney have to part with much of its staff is an especially troubling sign. It also points to the likelihood that Disney's financial results will be dragged down by the struggling theme park business for some time.

So, how should investors react to this news? Disney's stock has slipped lower since the announcement while the Dow Jones Industrial average has trended higher reaching 30,000 for the first time. Its not often that Disney shares don't participate in a broader market rally—and this may be a signal that the oft Dow leader may soon become a laggard.

Why is Disney Laying off Workers?

The latest layoff figure represents more than 20% of Disney's employee base in its parks, experiences, and products division (and over 15% of its total workforce). This segment also includes the beleaguered resorts and cruise line businesses that are hurting just as bad as the theme parks. On top of the 32,000 job cuts, Disney also furloughed approximately 37,000 additional workers.

Of course, when companies reduce their workforce, they are trying to lower expenses in anticipation of lower revenues. But will these measures be enough to offset the rapidly dwindling theme park attendance?

The terminations are expected to occur in the first half of 2021 when Disney's domestic and international theme parks will continue to see muted demand, that is, if they aren't closed down. Last quarter Disney reported a 61% revenue decline in its parks segment and a $2.4 billion plunge in operating income.

Looking into the second half of next year, its hard to envision operating conditions at the theme parks improving much­—and things get even get worse.

Is There More Trouble Ahead for Disney?

We are presently in this strange middle ground where COVID cases are surging to record levels in the U.S., and yet positive vaccine developments offer glimmers of hope that the economy will soon be back to normal. Not to be a downer, but this is probably not reality.

Disney's California theme parks, which remain closed due to state guidelines, are located in a particularly bad area for rising caseloads—Orange County. In order to reopen, the number of cases need to dip below one per 100,000 people. Orange County is currently recording around 20 cases per 100,000 people.

Even if vaccines are eventually approved, it will take a long time before they reach the masses that are Disney's customer base. Moreover, some people have expressed concern over the potential efficacy and safety of the vaccine candidates which could lead to many choosing not to be vaccinated. And this by itself represents a risk for yet another surge in cases.

The point is, it will probably be longer than the market thinks before the magic of old returns to Disney's theme parks. It wouldn't be surprising to see further announcements regarding layoff increases that stretch into the back half of 2021.

Even once adventure seekers bravely return, Disney will be faced with considerable new expenses to keep parkgoers safe. Many of these costs will be permanent even in the post-pandemic world. This will make it harder than ever for Disney to produce its usual stellar bottom-line performances.

Is Disney Stock a Buy, Hold, or Sell?

In the near-term Disney's stock will continue to trade largely off virus and vaccine headlines. This makes it extremely difficult for investors that typically rely on the company's fundamentals to gauge its investment merits.

It's also a reason for investors to avoid such a speculative premise. The situation at Disney's all-important theme park business isn't likely to get better anytime soon. Based on recent COVID trends in California, Florida, and Europe, most of Disney's parks could be closed for all of 2021. Therefore, traders and short-term investors would be better served to wait in line for other stocks.

Longer-term investors, however, should sit back and let this movie play out for a while. Eventually, Disney shares may become too cheap and present a good buy opportunity. A stock price correction on par with the company's workforce reduction seems reasonable, so a 15% to 20% slide could be in the coming attractions for Disney stock.