As Bad as It Has Been, DIS Stock Will Likely Get Worse

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Disney (NYSE:DIS) is down over $59, or 39% from its 52-week high of $153.41. This is after having risen 18.7% to $93.31 per share from its recent lows. In short, DIS stock has taken a big hit, but it could fall much further.

As Bad as It Has Been, DIS Stock Will Likely Get Worse

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This is a massive company. Its market value is still an impressive $174 billion, even after losing $102 billion from its highest market capitalization. But this may not be enough of a cut, despite its huge brand name.

For example, revenues were $20.86 billion in 2019, and its net income was $2.15 billion, but Disney announced on March 16 that most of its operations were now in effect frozen. The impact of this will be very severe.

On March 19, 2020, Disney made the following statement: “We have closed our theme parks; suspended our cruises and theatrical shows; delayed theatrical distribution of films both domestically and internationally; and experienced supply chain disruption and ad sales impacts.”

The company also said its content creation, sports events cancellation and film / TV production shut-downs have been disrupted. In short, the company’s operations are effectively frozen.

Does a $174 billion market valuation at today’s price really reflect that reality? I don’t think so. The company itself doesn’t even really know what to expect going forward.

The Shutdown and Disney

Disney said it could not yet determine the severity of the impact of both the COVID-19 related shutdown on its businesses. It depends on the length and impacts. For example, the company is worried about potential changes in consumer behavior related to its products.

Disney makes most of its money from in-person attendance at its theme parks, movies, theaters and purchases of its goods related to brand name content. Only recently has the company started focusing on its online content and advertising related income.

Another major issue, which the company did not address in its statement, is the probably economic recession that will follow this shutdown. Will large crowd events or movies rebound even after the restrictions are lifted? Will there be discretionary income to do so?

If the U.S. and world enter a depression-like downturn, all bets are off for Disney’s sales. Moreover, the company said it could not estimate the effect on its borrowing costs.

Analysts Have Mixed Reactions About DIS Stock

Analysts are of two distinct minds about DIS stock. For example, Atlantic Equities upgraded Disney from to an Overweight recommendation. They said the stock is oversold.

The Atlantic analyst agrees that Disney’s basic businesses will suffer, but feels that the stock represents good value at today’s price. This assumes that the underlying businesses will improve later this year and next.

However, Guggenheim Securities set its recommendation to Neutral, down from Buy earlier. The Guggenheim analyst expects several rounds of earnings revisions from the company. He says that the theme parks and resorts businesses are under severe pressure.

DIS stock does not adequately reflect the lower level of earnings to come out over the next year or so. This is also what Morgan Stanley is concerned about. They think Disney is in the “crosshairs” of a recession and global pandemic.

Barron’s magazine recently wrote about the downturn in digital advertising as a result of the coronavirus impact. This has a clear effect on Disney’s cable businesses and channels.

What to Do With DIS Stock?

Disney’s popular brand name may help it outlast the long-term effects of the coronavirus impact and resulting recession, but is the market overvaluing that brand name at today’s huge market valuation?

For example, let’s assume the company losses half its earnings. Today’s market value of $174 billion divided by $1.075 billion (a 50% cut) puts DIS stock on a price-to-earnings ratio of 161 times.

That seems like an incredibly high price to pay for a brand name. I am not willing to pay such a high price. Maybe if the stock had an adjusted P/E ratio of 30 to 40 times. That implies that the stock should be at one-quarter of today’s price, or $25 to $30 per share.

During the last recession, between October 2008 and March 2009, DIS stock traded between $25 and$31 per share. Wake me up to buy Disney when the stock gets down to that price once again.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.


Article printed from InvestorPlace Media, https://investorplace.com/2020/04/dis-stock-will-likely-get-worse/.

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