The stock market seems to have shrugged off its coronavirus fears and resumed its march upward, led by Disney (NYSE:DIS).
Disney shares rose 2% on Feb. 3 and were up another 2.5% overnight. They opened for trade Feb. 4 at $145.49. That’s a market capitalization of $261 billion, a trailing price-to-earnings multiple over 21. The once-generous 44 cents per share dividend now yields just 1.3%.
The catalyst is earnings, due after the bell. Analysts expect $1.44 per share, and $1.51 is the new hope. Revenue is expected to be $20.8 billion. During the same quarter last year Disney earned $1.84 per share but revenue was just $15 billion.
The Problems Are Real
Investors today are buying some great yesterdays and ignoring what are potentially some sad tomorrows.
The fact is that Disney has two Chinese theme parks, one in Shanghai and one in Hong Kong. The next quarter there should be terrible.
Disney has also been busy executing careers, as top officials at its Twentieth Century Pictures unit and Hulu streaming service are let go. Shuffling desk chairs can be distracting.
Disney investors are going all-in on the idea that it controls what the world wants to watch. One catalyst for the Feb. 3 rise was word it’s paying $75 million to put the stage version of Hamilton into movie theaters. The cast taped three performances in 2016 before breaking up.
Hamilton, and everything else Disney has ever made, will go into Disney+, the streaming service that debuted last year. The company’s earnings call will probably get a positive update on that service. But analysts will be ignoring the fact that Netflix (NASDAQ:NFLX) has over 150 million paying subscribers and Amazon (NASDAQ:AMZN) has more than 100 million Prime members getting its stuff. Regardless of how well it markets content, Disney still faces the task of scaling its streaming operations, both for customer accounting and show delivery.
Disney also faces several new competitors. AT&T (NYSE:T) and Comcast (NASDAQ:CMCSA) have both entered the streaming wars. While their offerings may not measure up, they control the last mile to most U.S. households. Disney, like ViacomCBS (NASDAQ:VIAC), has to do everything by itself.
The Sun Will Come Up Tomorrow
Once it gets past the ramp-up of its streaming service, sweeps up executive tears and gets China back on track, Disney’s future does look bright. Sort of.
Disney had $38 billion of long-term debt at the end of September, the result of its acquisition of Fox’s (NASDAQ:FOX, NASDAQ:FOXA) TV and movie assets. The Fox name is being taken off the studio, leaving them as Twentieth Century, in 2020. Disney had $8.1 billion of operating cash flow during the September quarter, but also needs about $800 million each quarter to cover the dividend.
That means Disney’s vaunted cash machine is stretched, until it repays its loans. A recession over the next few years, which many expect, would be a very bad thing.
The Bottom Line on Disney Stock
No stock rises to the sky.
A lot of people are buying Disney’s 2022, and forgetting it must get through 2020 and 2021 first.
Disney must ramp up its streaming operations, wait for China to get back online and pay off the costs of its recent growth spurt before investors see the fruit of its labors.
That means investors can (Hamilton pun) wait for it. After bad news hits, Disney shares will fall, and long-term investors will have a chance to get in.
For now, I think the price is too high.
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
