Disney (DIS) Takes it On the Chin as MoffettNathanson Downgrades

These days, the Magic Kingdom looks a lot more like a magic ghost town. The massive parks stand idle and mostly empty, with the possible exceptions of maintenance staff. The movie studios that produced the great Disney (NYSE: DIS) movies kids—and even grownups—clamored to see stand empty. And in the boardroom echo the wails of investors wondering why their retirement was stolen from them. MoffettNathanson heard those phantom cries, meanwhile, and issued a downgrade to Disney stock from “buy” to “neutral.”

A Business Model Mostly Incompatible With a Pandemic

Granted, very few businesses actually set up their entire operation based around the idea that, one day, a really communicable disease that occasionally kills people may crop up. But Disney is uniquely at risk from such a model, since most of its operations pretty much depend on large numbers of people in comparatively tight spaces at any given time. That was enough for MoffettNathanson's Michael Nathanson to come out and call Disney's risks “...significant and unrivaled...for the foreseeable future.”

Nathanson notes that the risks to Disney's operations are likely to last longer than expected, too; even as Florida starts the process of reopening, early word suggests that the reopening will not be all at once, but rather phased, and require certain elements of mitigation to stay in place. Throw in the potential risk of a second wave of infections, followed by a potential second wave of closures, and the results add up to bad news for the House of Mouse.

The Bad News Doesn't Happen All at Once, Though

Nathanson's forecasts went on from there. He noted that it was a safe bet that fiscal year 2020—and even at least parts of fiscal year 2021—would see a certain amount of investor benevolence, and that the company would be “given a pass” for these time frames. After all, it's hard to blame Disney for these results in anything but part, and the more blame you assign to Disney for this, the less tenable it is logically.

The numbers, however, make it clear there's a serious problem in the making. There's a forecast that suggests theme park revenue will drop from $26.2 billion to $17.7 billion just in this fiscal year alone, and there's another 1% drop slated for the 2021 fiscal year. Fiscal 2022, meanwhile, will see the “real” rebound, such as it is, when earnings jump 22% to $21.3 billion. That's still well under the levels seen in the 2020 fiscal year.

The film side won't do much better; Nathanson projects a 20% drop there, down to $2.7 billion. The media networks side—which should be the only bright spot since they don't depend on large groups in tight spaces—will still fall thanks to the massive advertising slowdown, dropping to $7.8 billion this year, down 4% on the previous year.

“The Risk-Reward is Just Not That Compelling”

Take all of Nathanson's projections together, and you've got a recipe for ongoing selling going into the next year or more, easily. This in turn led to Nathanson's most cutting remark that “...the risk-reward is just not that compelling.” That's a disaster for Disney, and one it can do precious little about. While certainly, investors will cut the company some slack going forward—it didn't start the pandemic and it doesn't control the government's response to it—there's only so much slack to cut before investors decide to cut bait rather than continue to try and fish for profits in a tangle of underwater tree roots.

There are some potential points Disney can work. One, it's still got Disney+, the ultimate bright spot in the Disney constellation right now. With people stuck at home, and even voluntarily in some cases even in states that are starting to open back up, streaming services should still be a plus. There's also a potential that Disney can take advantage of virtual reality systems to approximate the experience at home, using tools like Facebook's (NASDAQ: FB) Oculus Rift.

Disney's days of charging families big money for hotel space on the Disney property that costs another wad of cash just to walk into are over for the foreseeable future. Even when they do reopen, it's likely to be at vastly reduced capacity with significantly limited experiences. There was talk, for a while, of temperature checks, health screenings, and even liability waivers to sign before even walking in the door. None of these will mean big interest in hitting a theme park. Even if these don't come to pass, it's still a big risk in the Magic Kingdom right now, and one that will drag on stock prices for some time to come.