2020 has been anything but fairy tales for Walt Disney (DIS). The house of mouse has faced a slew of headwinds that have wreaked havoc on several of its segments, with it falling 14% since the start of the year. Will DIS shares be able to bounce back?
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Analyst Raymond Stochel, of Consumer Edge Research, says yes, but warns investors he expects “a longer road to recovery for the company than Street estimates.” He argues that the company does in fact have good things going for it, noting that he likes its long-term approach.
Expounding on this, Stochel stated, “We continue to believe the long-term strategy makes sense. We’ve been positive on Disney+, a healthy ESPN transition over time, international growth, and moving past 21CF integration headwinds. We believe investors now have some visibility on re-openings, but we certainly expect headwinds from capacity utilization across parks, stores, theatres, and more.”
Looking at the parks, experiences and products businesses, Stochel acknowledges that re-openings have acted as a positive catalyst. However, he points out that there’s still a significant amount of uncertainty and operational execution controls. In addition, given that there are more restrictions regarding international travel than domestic, foreign bookings are expected to land in the red.
The analyst added, “There’s also pockets of potential more material weakness (cruises, DVC, certain rides impacting the experience). Lower capacity could also impact fast pass sales (less useful if there are less people in the park). We’d expect pricing to be negatively impacted by the reduced capacity as well after a wave of early demand.”
On top of this, media networks have been hit hard by advertising headwinds. “Short-term, DIS indicated they are still paying for some sports rights, but this may vary by property and whether or not leagues can fulfill their obligations. We see a scenario where DIS has to pay for expensive rights in a condensed period where it’s difficult to appropriately monetize those rights with a bunched-up calendar,” Stochel commented. It should also be noted that the spot market may shift towards other channels like digital or OTT, and there are most likely problems with ABC local partners, in the analyst’s opinion.
Another issue raised by Stochel is that COVID-19 has led to theater closures. This is problematic for the company as it generates significant value from the box office. “We reject the idea that DIS benefits short or medium-term from the shift from an in-person experience to TVOD or SVOD. We don’t see the family of 5 as willing to hold ARPU from an in-person experience of $100-plus to an in-home experience,” he said.
With content air pocket and investment pullback representing additional reasons for concern, Stochel stepped over to the sidelines. Downgrading his rating from Overweight to Equalweight, he also put a $125 price target on the stock. Given this target, the upside potential comes in at a modest 2%. (To watch Stochel’s track record, click here)
Similar to Stochel, Wall Street isn’t completely sold on DIS. TipRanks analysis of 23 analysts shows a consensus Moderate Buy rating, with 10 analysts recommending Buy, 11 suggesting Hold and 2 saying Sell. At $117.81, the average stock-price forecast puts the downside potential at 3.5%.
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