Disney Rips the Band-Aid Off

For buy-the-dip investors, Disney (NYSE: DIS) was one of the most-watched stocks as equity markets plunged through the first three weeks of March. The company’s main revenue stream is its 11 theme parks around the world which were obviously one of the first casualties of the coronavirus pandemic. As non-essential travel ground to a halt and as people hunkered down at home, the parks shut their doors. Movie theatres were also shut so Disney’s production projects were halted and needless to say no new Disney cruises were leaving port. In a bid to slash costs, management furloughed 100,000 employees and secured a fresh $5 billion in debt to help ride out the storm.

Still, with its $185 billion market cap, 1.7% dividend yield and an unbeatable brand, it proved irresistible to many investors when the stock was beaten down as far as 2014 levels, almost 50% from its previous all-time highs. Bear in mind, the stock was trading at these highs as recently as the end of last year so management were obviously doing something right before global factors took control. Since those lows in March, like many equity names, they’ve had a solid bounce and were up as much as 40% in little more than a month through last week. But all eyes and ears have been on their fiscal Q2 earnings to see just how much real damage the pandemic has done.

Disney Stock - How Bad Is it?

Investors got their answer after the bell on Tuesday. And even with weeks of anticipation and expectations of the worst, the numbers were still a bit of a mixed bag. Both non-GAAP and GAAP EPS had bad misses on analyst expectations while revenue came in above the consensus. The disappointment in the former number might be offset with the fact that the latter number still showed 20% growth compared to the same quarter last year. Still, there was only one banner headline making the rounds after the release and that was that Disney’s net income had fallen a full 91% in the three months through March of this year.

Investors and those on the bull side were glad to see that Disney’s video on demand streaming service, Disney Plus, had solid growth in subscribers as this revenue stream was the only one really unaffected by the pandemic. The subscriber count here increased 26% from the previous quarter and helped to drive revenues from Disney’s direct-to-consumer and international division up by 260%. The company’s other streaming services, ESPN+ and Hulu saw growth too and played a role in helping to shore up the defenses. Management also took another step in their bid to conserve cash by halting dividend payouts for the first half of 2020.

It was CEO Bob Chapek’s first earnings release having taken the helm in February. The former parks chief said with the release; “while the COVID-19 pandemic has had an appreciable financial impact on a number of our businesses, we are confident in our ability to withstand this disruption and emerge from it in a strong position. Disney has repeatedly shown that it is exceptionally resilient, bolstered by the quality of our storytelling and the strong affinity consumers have for our brands, which is evident in the extraordinary response to Disney+ since its launch last November.”

Turning a Corner

And as we start to see states and countries reopening their economies, it seems like there might be light at the end of the tunnel. Yesterday, the company announced their plans to reopen their Shanghai parks on May 11 along with phased reopening plans for their other parks. There’s also been signs that consumers are still interested in purchasing cruises and demand for their video streaming service is surging. The company now has more than 50 million paid subscribers and many of those who were incentivized to sign up via the stay-at-home orders will stick around long after the pandemic is over.

While these earnings were never going to be stellar, they had to be released and at least now investors have less uncertainty about the state of play. The company has been hit hard in the most obvious places but is doing well elsewhere and prior demand for the former can be expected to trend back towards normal as we come out of this.

Shares were trading flat in pre-market trading on Wednesday and it will be interesting to see how the rest of the week plays out. You can’t help but feel that while there’s pain in the short term, long term there’s value to had at these levels.