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Why Disney Stock Dropped 15% in February

By Beth McKenna - Mar 3, 2020 at 8:11AM

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COVID-19 has spooked investors in the entertainment giant.

What happened

Walt Disney (DIS -1.31%) stock fell 14.9% in February, according to data from S&P Global Market Intelligence. For context, the S&P 500 index dropped 8.2% last month. The market sell-off was due to concerns that COVID-19, the coronavirus disease that has infected more than 90,000 people, could significantly hurt the global economy.

Shares of the entertainment titan, one of most popular consumer discretionary companies, have returned -17.1% in 2020 through March 2, versus the broader market's -4% return.

Exterior view of Cinderella's Castle at dawn or dusk.

Image source: Walt Disney.

So what

We can attribute Disney stock's disappointing performance last month to two main catalysts: COVID-19 and the CEO change. Both these things scream uncertainty, and the market hates uncertainty.

DIS Chart

Data by YCharts.

Disney stock moved lower throughout most of the month, with the steepest drop coming at the end of the month when reports came out that the virus had spread well beyond China. Investors are no doubt concerned that the temporary closures of the company's Shanghai and Hong Kong parks could last longer than the two months management estimated in early February. These parks closed their gates on Jan. 25 and Jan. 26, respectively, in order to help prevent the spread of COVID-19.

Investors are also probably worried that the worsening epidemic could cause additional park closures, or at least result in more consumers avoiding the company's open parks, most notably its Walt Disney World and Disneyland parks in the United States.

Here's what Disney CFO Christine McCarthy said on the company's Feb. 4 fiscal first-quarter 2020 earnings call about this topic: 

At Shanghai Disney Resort, we currently estimate the closure of the park could have an adverse impact to second-quarter operating income of approximately $135 million, assuming the park is closed for two months during Q2. At Hong Kong Disneyland, we currently estimate the closure of the park could have an additional adverse impact to operating income of about $40 million for the second quarter. [This estimate also assumes a two-month closure.]

Disney stock dropped 3.8% on Feb. 26 following the company's announcement after the market closed the day before that it had named Bob Chapek as its CEO, effective immediately. Chapek had served as chairman of the Disney parks, experiences and products segment since its creation in 2018, and prior to that had been head of the parks and resorts segment since 2015. 

He succeeds Bob Iger, who led the company for more than 15 years and was very well regarded. Iger "assumes the role of Executive Chairman and will direct the Company's creative endeavors, while leading the Board and providing the full benefit of his experience, leadership and guidance to ensure a smooth and successful transition through the end of his contract on Dec. 31, 2021," according to the press release.

Now what

Since February's trading ended, there's been another notable happening on the coronavirus front: On Saturday, Tokyo Disneyland began what it said will be a approximate two-week closure to help prevent the spread of COVID-19. It plans to reopen on March 16. 

Investors who are long-term focused should sit tight. Yes, the temporary closures of all three of the company's Asian parks is poised to significantly negatively impact Disney's fiscal second-quarter results. And, yes, it's also probable, in my opinion, that the company's attendance at its two U.S. parks and its cruise line bookings will be hurt for at least a few months. However, Disney's bright long-term prospects have not changed.

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