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Why You Should Buy Disney if More Parks Close

By Parkev Tatevosian - Mar 12, 2020 at 11:34AM

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Several Disney parks have temporarily shut operations to prevent the spread of the novel coronavirus, and additional closures could be coming.

Disney (DIS 3.69%), like many other businesses, is facing the many challenges that arose with the outbreak of the novel COVID-19 coronavirus. It has already shut down operations at three of its parks. With the recent news that a staff member in its Paris location tested positive for the coronavirus, the likelihood of more paused operations increases.

If it does close additional parks in areas where risks of contracting the virus are rising, it would be the prudent thing to do. Here are a few reasons why the potential sell-off of its stock following such an announcement could present a buying opportunity for long-term investors.

Visitors at a theme park on a swinging ride.

Image source: Getty Images.

Disney is much more than a magic castle

You may be surprised to find out that, according to its most recent earnings report, the segment that includes parks, experiences, and products generated only 35% of total quarterly revenue for Disney. That number is likely to shrink as Disney+ and Hulu continue building subscribers worldwide.

And the company plans to introduce Disney+ in several additional countries later this month. The expansion could add millions of subscribers, which would further decrease the share of revenue provided by its parks.

As people stay at home more, content consumption will likely increase. Fortunately, its streaming services will provide some magnitude of an offsetting effect from lost revenue in its parks.

Determining the financial effects of park closures

When it comes to park closures, investors have an estimate of the economic effects on the company's earnings reports. Management expects the closures of its Hong Kong Disneyland and Shanghai resort to lower operating income by roughly $175 million in the second quarter should the parks remain closed for two months. To put that figure into perspective, in the first quarter total operating income was $4 billion.

In the most recent conference call, CFO Christine McCarthy said, "The precise magnitude of the financial impact is highly dependent on the duration of the closures and how quickly we can resume normal operations," reminding investors about the uncertainty surrounding the outbreak and containment efforts.

Importantly, there was no mention of any permanent negative effect.

Delayed visits or canceled altogether?

The critical question that remains is whether park closures will lead to delayed vacations, or if families will cancel without rescheduling.

In the end, some will probably delay vacations, and a few will cancel them. Overall, the allure of visiting a Disney park will almost certainly remain. As soon as the pandemic starts to recede, and it is safe for affected areas to resume normal operations, investors can expect people to return to Disney parks with the same, if not elevated, excitement as before it.

What this means for investors

Preparing for an event that may affect a company and possible actions you can take in response is good practice. In this case, additional park closure announcements by Disney could cause its stock price to drop significantly. Investors should be prepared to buy the dip should the scenario become a reality.

Furthermore, since no one knows the severity or the duration of the COVID-19 outbreak, it would be pragmatic to dollar-cost average your way into this blue-chip stock.

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