Shares of Disney (DIS -2.88%) have been clawing their way back into investors' fancy this week, closing above $100 on Tuesday for the first time in nearly two weeks. Investors are flocking to the media giant, but it has a long way to go before revisiting the all-time highs it hit just before Thanksgiving last year.
Disney stock is still trading at a 34% discount to its highs, and that's going to be a dinner bell for investors who realize that the shares would need to soar by better than 50% to get back to their peak. There's a lot to like when it comes to Disney, and I've been a shareholder since the 1980s. But there are also plenty of things to consider before betting big on the House of Mouse. Let's go over five questions that investors should need to answer to see if the bullish argument makes sense.
1. When will theme parks open again?
Disney theme parks in China have been closed since late January, and as of mid-March all of its gated attractions worldwide remain shuttered. Theme parks have always been a big part of Disney's business, and with its growing cruise fleet also idled, there is going to be a big hole in the company's operations until the parks reopen.
It was originally hoping to reopen by the end of last month, but now the attractions are off-limits indefinitely. Will the parks be open in time for the potent summer season? Is fall a more realistic target? What happens if the coronavirus returns after the parks start entertaining guests? Will it be an even longer interruption?
2. Will movie theaters be popular again?
Disney is already paying the price for multiplex operators across the country shutting down in mid-March. Pixar's Onward had its theatrical run cut short by the interruption, forcing it into digital distribution within two weeks of its release. Upcoming releases have been bumped into the future by months to as much as a year.
Movie theaters will eventually reopen, and probably even sooner than Disney's own theme parks. The real question here is whether audiences will be back. Debuting on the big screen is a major revenue channel for big-budget studios productions, but what if folks realize during this quarantine that they don't miss the box office experience? Digital distribution as it stands now is no match for what a blockbuster can collect in first-run ticket sales.
3. Is Disney+ enough to offset the cord-cutting?
There's no denying that Disney+ is a bright spot for the company these days. The streaming service that launched in November has been ridiculously popular, and reached 28.6 million subscribers by early February. The Mandalorian was a hit through the first few weeks of the platform's launch, and Disney is keeping fans close with Frozen 2 and now Onward in the growing Disney+ catalog.
The real question here is how much of the success of Disney+ will come at the expense of its flagship media-networks segment. Disney+ is $6.99 a month, but if someone cancels a pricey cable or satellite television package to take advantage of streaming services, it's going to leave a mark. Disney makes more off of just ESPN from folks with pay TV bundles that include the leading sports programming network than it does from a Disney+ subscriber.
4. How low will earnings go through the next few quarters?
There's no point in valuing Disney with trailing multiples. That road is closed. The company was more than 120 consecutive months into an economic expansion, but that momentum is gone. It will be a long time before Disney is as profitable as it was during the past couple of years
Analysts see profits heading lower now, and understandably so with so many of its businesses on ice. Disney generated adjusted earnings from continuing operation of $5.77 a share in fiscal 2019, down from $7.08 a year earlier. Analysts see a profit of $4.01 a share this year and $5.25 a share in fiscal 2021, but don't hang your hat on those numbers. Those forecasts have been moving lower: down 25% over the past two months for fiscal 2020 and 15% for next year. But a lot of the analysts baked into the consensus estimate have yet to update their numbers to reflect the current situation.
Disney's not posting net income of $4.01 a share this year. Wall Street pros see it earning as little as $1.67 this fiscal year and $2.42 come fiscal 2021, and even those figures may prove conservative if attraction closures keep getting extended and the king of content can't make new shows or movies.
Disney may seem cheap at 18 times trailing earnings. And going by the current consensus, it may not seem outrageous to pay 25 times this year's expected profit for the top dog in family entertainment. The problem is that just a few of the falling dominoes have been factored into today's forecast. How low will earnings go?
5. Where will the consumer be at the end of this?
You're one tough cookie, and we'll both share a rum-spiked Dole Whip when we get out of this coronavirus crisis, but who will pay for it? Unemployment claims are spiking, and most economists see a sharp near-term drop in the economy. We'll bounce back; we always do. The problem here is gauging how long it will take for the economy to recover.
Disney parks aren't cheap. A night at the movies is no bargain. Your family is getting good use out of that fat cable bill right now, but it's going to be a budget item for a lot of folks at the other end of this COVID-19 crisis. Disney was already staring at a tricky 2020 with a much weaker slate of films than it put out last year, and now we have to consider how many people can afford a trip to Disneyland or how many people want to take any cruise, much less a premium-priced Disney sailing. It will take more than a couple of quarters for consumer momentum to bounce back as we prepare for a recession, and that has to be factored into Disney's near-term prospects as a stock.
I'm not selling my shares, but I also haven't rushed to add to that position in the sell-off. There are a lot of questions out there, and you may not like the answers.