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Why I'm Not Worried About Disney Stock After the Latest Report

By Jeremy Bowman – May 9, 2020 at 6:13AM

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Disney is down, but it's definitely not out.

Almost no company is getting hit in as many different ways by the COVID-19 pandemic as Disney (DIS 3.70%).

All six of its theme parks around the world are closed. Its cruise ships are docked. Live sports are gone from ESPN, and movie theaters are closed, while live-action film production has gone on pause, cutting off its studio entertainment division at both ends.

Disney revealed its quarterly numbers for the first time since the pandemic started, and they weren't pretty. Though revenue actually rose 21% to $18 billion, largely because of its acquisition of Twenty-First Century Fox last March, segment operating income, which excludes certain corporate costs, was down 37% to $2.4 billion, and adjusted earnings per share plunged from $1.61 to $0.60. 

The threat of the coronavirus going forward was enough to make the company take on nearly $7 billion in debt and add another $5 billion to its credit facilities. Disney will also forego it semi-annual dividend payment in July, saving it approximately $1.6 billion, and furloughed about 100,000 employees on April 19, mostly from its parks staff.

Investors took the news in stride. The stock barely moved on the report, which may have been helped by news that Shanghai Disneyland would reopen next week, though at much lower capacity than normal.

Disney's commentary and the current reality of the coronavirus mean that the company is going to be feeling some kind of impact from the pandemic for at least the next few quarters, if not years. However, the stock still looks like a winner for long-term investors. 

The Magic Kingdom at Disney World

Image source: Disney.

The brand value isn't going anywhere

Few brands enjoy the kind of customer loyalty and enduring relationships that Disney does. Ranked #10 by Interbrand on its list of Best Global Brands with an estimated brand value of $44.4 billion, the company has arguably more multi-generational brand power than any other company. The love for the nearly century-old Disney, its movies, theme parks, and other products is passed down from one generation to the next, shared among parents, children, and grandparents. Though the company has plenty of competitors, there's no true peer when it comes to children's and family entertainment around the world, or the magic and happiness that the Disney brand represents.

Former CEO and now Chairman Bob Iger put his finger on this on the earnings call when he said:

"In fact, it's quite possible that what we create is appreciated now more than ever because people find comfort and inspiration in our messages of hope and optimism. This is the same reason we believe people will resume familiar activities once this crisis ends. They missed doing the things they enjoy, things that make them feel happy and connected with family and friends. Whether it's going to movie theaters to see our films or visiting our theme parks around the world or watching live sports on ESPN, people want good news. They want to experience joy and the feeling of togetherness. And for all these reasons, we will continue to tell stories that uplift and enrich people's lives."

Disney's businesses -- theme parks, movies, and sports -- are timeless passions, and will almost certainly benefit form pent-up demand when it is safe to enjoy them again. Even during the pandemic, the draw of Disney's assets is as clear as ever. On ESPN, its coverage of the NFL Draft saw a 58% jump in viewership from last year, and The Last Dance, the ten-part documentary about Michael Jordan and the Chicago Bulls, has become the most-watched ESPN documentary ever and the #1 program in the U.S. among all key male demographics. Those results indicate sports fans badly miss live sports. Similarly, The Disney Family Singalong, which aired April 16, garnered more than 13 million views, topping TV ratings the night it aired and again showing the strength of the Disney family of brands and customer loyalty. Disney has another sing-along planned for Mother's Day.

While Disney's business is temporarily crippled by the pandemic, it's not at risk of being disrupted the way businesses like brick-and-mortar retail are, and Americans and others suffering from the pandemic are clearly missing things like live sports, movies, and theme parks. There's little reason to doubt that demand for those things will bounce back when they are available again.

Meanwhile, the stay-at-home orders may be helping Disney rapidly grow its streaming business. The company revealed that Disney+ had reached 54.5 million subscribers as of May 4, while it continues to see growth at Hulu and ESPN+. Revenue at its direct-to-consumer and international segment jumped from $1.1 billion to $4.1 billion in the quarter, though it's expected to operate at a loss for the foreseeable future. Just six months after its debut, Disney+, which is set to launch in Japan, several European countries, and Latin America in the coming months, has smashed growth expectations -- Disney had originally forecast that it would have 60 million-90 million subscribers by 2024. The company now looks well on pace to break into that range later this year.

With Hulu and ESPN+, Disney is emerging as the strongest challenger to Netflix's streaming supremacy, and the leading streamer now has a larger market cap than Disney.

Considering that Disney may have a streaming business on par with Netflix in just a few years, investors are essentially getting the rest of the business for free now. Though the coming months will be tough for the entertainment giant, pent-up demand, brand loyalty, and growth in streaming will eventually drive the stock to new heights.

Jeremy Bowman owns shares of Netflix and Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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