In a stunning assessment of how badly its business could be damaged by the coronavirus pandemic, the Walt Disney Company was just downgraded by one of its most reliable cheerleaders in the investor world.
Analyst firm MoffettNathanson on Monday downgraded Disney stock from buy to neutral, noting that the effects of COVID-19 are likely to ripple across Disney’s diverse mix of business units for much longer than was originally anticipated. Diversification, long seen as Disney’s advantage over its media competitors, has turned into a drawback almost overnight. As the pandemic lays waste to travel, theme parks, moviegoing, and production schedules, Disney is exposed at almost every corner. Even the one bright spot in the crisis—the increase in TV viewing brought on by the lockdowns—is dimmed by the absence of live sports, the lifeblood of Disney-owned ESPN.
“For more than a decade, we have been stalwart believers in the factors that make Disney different than the rest of the media pack,” the analysts wrote. “The company’s leadership, strategic positioning, asset mix and brand equity have consistently delivered for their investors. We are downgrading Disney to Neutral, not because we have lost faith in those attributes, but rather because we believe there are a number of risks that could lead this unprecedented event to have a longer impact, with earnings revisions massively skewed to the downside.”
Disney’s three highest-performing units—media networks, studio entertainment, and theme parks—are all expected to take a significant hit. MoffettNathanson notes that advertising declines at Disney-owned TV networks are likely to be “worse than we first projected,” while Disney’s movie business will continue to be battered by the closure of movie theaters and interruptions in production schedules.
Then there are the theme parks, which were a source of reliable growth for Disney before they shut down in March. Disney’s theme parks unit grew 6% to $26.2 billion last year, and it was expected to see ongoing benefit from the recent opening of Star Wars-themed attractions in California and Orlando.
MoffettNathanson says theme parks could be impacted not just by the current closures but a residual downturn in discretionary spending brought on by a recession, which might not be felt right away. The firm acknowledges that Disney will get a pass from investors this year, and perhaps even next year, but looking further down the road, to 2022, the analysts say Disney’s “risk-reward is just not that compelling.”
Disney shares were down almost 4% in early trading. The company reports earnings for its fiscal second quarter tomorrow, after the closing bell.