Disney’s Hong Kong Closure Could Send Risk-Aversion to the Fore

An investor’s mind is a funny thing when it comes to risk-return judgment. Research on risk-aversion has found that most investors dislike losses more than they find joy from gains. The result from this is that the magnitude of news-driven market sell-offs are far worse than the velocity of gains after good news has hit the headlines.

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Disney (NYSE:DIS) stock is standing on a frail foundation already as global pandemic re-opening hasn’t been as successful as many would have hoped by now.

And my senses tell me that we could well see an example of risk-aversion play out among Disney investors as the new omicron variant is having a substantial impact across the globe; here’s why.

Hong Kong Disneyland Closure

Disneyland in Hong Kong has closed for a fourth time as the city has taken another hard stance to mitigate the spread of the omicron variant. The park is shutting down for two weeks, according to its website, which reads as follows: “as required by the government and health authorities and in line with prevention efforts taking place across Hong Kong.” There is some positive news, though, as the hotels and their restaurants and recreational facilities will stay open although with limited capacity. 

This doesn’t spell a good start to 2022 for Disney, providing the possibility that the Hong Kong closure could be the first of an array of closures around the globe amid the inter-linkages of covid-19 mitigation policies.

The company operates a hybrid business model, with approximately 25% of its revenue being generated from asset-heavy operations such as its parks. Disney has already experienced a 61.83% contraction in parks, experiences, and products revenue growth during the pandemic, which has caused the firm’s interest coverage ratio to trade 21.69x below its historical highs, subsequently spelling liquidity concerns. 

Overvalued and Earnings aren’t Catching Up

DIS stock is overvalued relative to just about every benchmark available, but let’s compare its ratios relative to their 5-year averages for practicality’s sake. Disney’s price-to-earnings ratio is overvalued by 2.04x, with its price to sales and price to cash flow ratios also trading at premiums worth 20.12%, and 69.72%, respectively.

I see little way back for DIS stock on a short-term basis if we consider additional factors such as poor efficiency with enterprise value to EBITDA trading at a 75.17% premium and low re-investment rates with capital expenditures decreasing by 11.04% over the past year as well.

It doesn’t change much if we switch our vantage point to look at the trajectory rather than the current valuation metrics. Disney released its full-year results in November last year, where it reported subdued results as the company missed on profitability expectations.

Disney reported a 39% decrease in year-over-year operating income of its [media and entertainment] segment, and although its park and experiences segment recovered by 47%, it’s likely to revert down as omicron plays its role.

I can’t possibly see a bright first quarter for DIS stock as there are too many headwinds. It’s doubtful that omicron will be the final covid-19 variant, and the hard stance of nations on public events will likely sustain poor Enterprise Value to EBITDA ratios for the firm’s parks and experiences segment.

Furthermore, Disney’s media and entertainment division has probably hit peak growth for now and is unlikely to facilitate the losses incurred by other business units. A final factor to consider would be the stagnating GDP growth, Goldman Sachs cut its anticipated 2022 GDP growth down to 3.8% from 4.2%, and consumer discretionary services could falter should stagnation materialize.

What Now For DIS Stock?

There’s no logical reason to invest in DIS stock right now. The stock is overvalued as things stand, and continued pandemic lockdowns are likely to prevent the company’s asset-heavy segment to recover fully.

Furthermore, a stagnating economy and lackluster results from the firm’s media and entertainment segment also don’t provide much hope. DIS stock is a dangerous place to be in at the moment as risk-aversion could soon cause a significant drawdown.

On the date of publication, Steve Booyens did not hold any long or short positions in any of the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, BenzingaGurufocus, and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency, and ESG. 

Article printed from InvestorPlace Media, https://investorplace.com/2022/01/dis-stock-could-be-affected-greatly-due-to-disneys-honk-kong-closure/.

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