The Walt Disney Company (DIS 0.85%) has had a rough couple of years since the pandemic began. The pandemic forced Disney to temporarily lock all the turnstiles at its theme parks, which caused a significant decline in visitors. Disney World is bouncing back, but it could be a while before it is back to full strength.
Disney investors face some significant red flags: The company has a heavy long-term debt load and could suffer in an inflation-induced recession.
NYSE: DIS
Key Data Points
1. Heavy debt burden
Before the outbreak, Disney already had a substantial debt balance. At the pandemic's onset, Disney borrowed more to ensure it would make it to the other side. The recovery is materializing slowly, meaning it will take more time for Disney to pay down its debt balances. From October 2021 to April 2022, Disney managed to pay down roughly $2 billion in its long-term debt obligations but still held $46.6 billion. You can see the expansion of debt over the long term in the chart below.
DIS Total Long Term Debt (Annual) data by YCharts
Thankfully, Disney's excellent credit rating allowed it to borrow at lower interest rates. In the six months ending in April 2, Disney paid interest expenses of $666 million. Annualized, it would be an estimated $1.3 billion. Considering a debt load of over $50 billion, the interest expenses are relatively low. Still, the costs are hurting Disney's bottom line.
2. Inflation-induced recession
The vast majority of Disney's revenue is considered discretionary spending by consumers. People typically visit a theme park, book a cruise, or go for a night out at a movie theater only after paying for necessities like rent and groceries. Unfortunately, prices for rent, groceries, and gasoline are rising rapidly. The consumer price index measures a basket of goods, growing at its highest rate in nearly four decades.
U.S. Consumer Price Index YoY data by YCharts
If folks have to pay more for necessities, it will leave them with fewer dollars to spend on Disney's products and services, a red flag, to be sure.
3. Persistent COVID-19 disruptions
While billions of vaccinations against COVID-19 have been administered worldwide, the pandemic is far from over. Many folks are still getting sick, and governments outside the U.S. are still implementing business restrictions. Disney's business relies heavily on bringing large groups of people together in person, so the persistence of COVID-19 is a red flag. For instance, its theme park in Shanghai is still shut down after the government in China imposed lockdowns on the city following an outbreak of COVID-19.
Moreover, there is no guarantee that the virus will not mutate further, rendering existing vaccines even less effective and forcing business restrictions in more significant parts of the world economy. So long as COVID-19 is around, that risk still remains for Disney.
Disney's stock has paid the price.
DIS PS Ratio data by YCharts
Disney faces headwinds, to be sure, but its stock has arguably paid the price. Disney is down 52% off its high and is trading at a price-to-sales ratio near its lowest in the previous decade, especially if you exclude the short time right after the outbreak of COVID-19. That means that investors have already accounted for the potential downside from the red flags mentioned above. For that reason, investors need not stay away from Disney's stock right now. On the contrary, it looks like investors have overreacted to the potential for these red flags to hurt Disney's bottom line.
