The stock market isn't always rational. If it was, it would give more credit to companies that are in short-term trouble but have tremendous future potential. The Walt Disney Company (NYSE:DIS), American Express (NYSE:AXP), and Skechers (NYSE:SKX) are all companies that are riding out the COVID-19 disaster with plans for high growth.
The power to pivot
Travel and entertainment stocks have suffered acutely during the pandemic as people stay home, and entertainment giant Disney is no exception. Its huge theme parks and experiences, such as cruises and resorts, typically make up the largest revenue-generating segment. But in the third quarter that ended June 27, when most of its parks were still closed, its revenue declined 85%, contributing to a 42% overall decline. It's no wonder Wall Street wasn't thrilled.
But Disney is a powerful company with its finger in many pies, including the most valuable media library in Hollywood. It launched Disney+, a paid subscription movie service like Netflix (NASDAQ:NFLX), right before the pandemic, and its success has beat expectations. Along with its other streaming channels Hulu and ESPN+, Disney has over 100 million subscribers and a way to bring in revenue while parks are in a slump.
In light of these trends, which don't seem like they'll be leaving anytime soon, Disney announced a reorganization of its businesses that concentrates its resources on streaming. Disney's film studios accounted for seven of the top 10 U.S. highest-grossing movies in 2019, but with theaters closed or at limited capacity, feature films sent to theaters are in danger of not making high sales. Disney sent Mulan and Hamilton straight to streaming, and even charged paid subscribers an extra $29.99 to see Mulan. The new company structure is meant to harness the studios' talent into the best revenue-generating schemes.
The share price is up from its March plummet and is now down 11% year to date. Investors are impressed with the company's new focus on streaming, but not impressed enough.
Disney will report fourth-quarter earnings on Nov. 12, and investors should expect to see some improvement from the previous quarter. CFO Christine McCarthy said that higher sales from streaming subscribers will be offset by marketing costs, but with lots of new ideas up Disney's sleeve and the ability to carry them out, sales and profitability will bounce back over time.
Too many customers are leaving home without it
American Express is a unique company in that it's a credit card issuer as well as processor, so it makes money from both buyer and seller. It also offers solutions to small and medium businesses. The company serves a generally affluent clientele, which gives it some relief during economic downturns since its customers tend to have more discretionary spending money. Its emphasis on travel and leisure meant that during the pandemic customer spending declined. This continued through the third quarter, that ended Sept. 30. Revenue dropped 20% year over year, and earnings came in at $1.30, down from $2.08 last year. Volume in non-travel and entertainment was up year over year.
The company has made several acquisitions over the past year, most recently purchasing financial technology company Kabbage, which offers finance solutions for small businesses. Despite the heavy cash outlay for marketing costs and acquisitions, American Express still posted significant earnings. They would have been even better, but CEO Stephen Squeri said that management is considering long-term gains at the expense of short-term pressure.
None other than investing guru Warren Buffett is a firm believer in American Express. His company Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) owns more than $14 billion of AmEx's shares, his fourth-largest holding. American Express is also the first U.S. financial services company to get clearance to offer credit cards in China.
So while the company is clearly going through a period of flux, all signs point to a strong recovery. Shares are down 22% year to date as of this writing and trading at only 24 times trailing 12-month earnings, making now a great time to buy in.
An off-price model with high potential
Skechers is the leader is value athletic footwear and apparel. It's been criticized for copying premium brand leaders like Nike (NYSE:NKE), but that hasn't stopped customers from loving its products. Annual sales grew to a record $5.22 billion in 2019.
Skechers has a strong global presence despite a less-than-stellar U.S. performance. During the first quarter, when lockdowns started, global comps were still up 9%. In the second quarter ended June 30, which covered most of the global lockdowns but a recovery in China, sales in China were up 12%. Overall sales were down 42%, but e-commerce rose 428%. That's an important development for the company, which has been behind on digital progress. CFO John Vandemore said on the second-quarter analyst conference call that Skechers is launching a new website, which went live that week, and is also rolling out a new mobile interface and loyalty club. Those initiatives are coming on the heels of a great digital quarter, and between them and over 90% of stores already open by the beginning of the quarter, investors should expect improved metrics in the third quarter.