Disney Analyst Cuts Earnings Estimates on Coronavirus

Bob Chapek, chairman of Walt Disney Parks -March 25, 2017 - Getty-H 2020
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"COVID-19 is having a disproportionately negative impact on Disney's three largest profit centers," Needham analyst Laura Martin writes in a report.

With more sports events and theme parks closing due to the coronavirus and COVID-19, the respiratory illness it causes, some Wall Street analysts late in the week reduced their financial estimates for the Walt Disney Co.

"COVID-19 is having a disproportionately negative impact on Disney's three largest profit centers," Needham analyst Laura Martin wrote in a Friday report entitled "Maybe Magic, But Not Lucky." "As of last night, Disney will close all its theme parks globally; the NCAA, NBA, MLB, MLS and NHL canceled or postponed their seasons and ESPN is the largest aggregator of sports programming; and many film openings (including Disney's Mulan) are postponed, which adds competition upon ultimate release and writes off marketing spending to date."

She suggested it was "unlikely that COVID-19 worries dissipate by April 1, so we lower estimates" for the second calendar year quarter of 2020 for Disney. Added Martin: "Further, we do not believe that lost demand is moved to later periods because: Disney parks operate at near capacity levels normally, sports seasons end; and postponed films face tougher competition and require more marketing spending."

She lowered her second-quarter 2020 Disney revenue estimate by 7.6 percent to $19.7 billion and her earnings per share estimate by 14 percent to $1.20. "Since the consensus earnings per share estimate for the fiscal year is higher than ours, we expect estimates to trickle down over the next several weeks," she added. "Our projections assume normal operations for parks, ESPN and films by the end of June, based on successful COVID-19 containment."

For Disney's Parks, Experiences and Consumer Products segment, Martin cut her second-quarter earnings estimate before interest, taxes and amortization estimate by 14 percent to $1.63 billion and her full fiscal-year estimate by 4 percent to $6.8 billion. Disney's fiscal year ends in September.

For Disney's cable networks unit, Martin reduced her second-quarter earnings estimate by 10 percent to $1.38 billion and her full fiscal-year estimate by 6 percent to $5.36 billion. "It is unclear whether leagues that canceled or postponed their seasons will compensate ESPN for disruption from a pandemic. It depends on specific contract and insurance language," she wrote. "For sure, ESPN has to fill many hours of programming on short notice, which adds programming costs and lowers viewing, which hurts ad revenue near term."

Martin also cut her filmed entertainment unit earnings estimate for the June quarter by 11 percent to $613 million and her full-year estimate by 2 percent to $3.13 billion. "So far, Disney has postponed Mulan from March 27, The New Mutants from April 3, and Antlers from April 17," the analyst wrote. 

Martin has a "hold" rating on Disney's stock. Near-term, that is "based on our belief that consensus estimates are too high for Disney owing to COVID-19 disruption of many of its consumer-facing businesses," she wrote. "Longer term, our 'hold' is based on Disney's statement that its streaming initiatives will break even in 2024, suggesting that Disney's streaming investments will lower Disney's earnings per share for the next several years."

Her Disney estimate reductions came a day after Imperial Capital analyst David Miller on Thursday cut his Disney stock price target to $118 from $144, saying the firm's Orlando Walt Disney World Resort should be hit by the coronavirus-driven closure and be affected more than the company's Disneyland Park in Anaheim. Travel cutbacks will be a burden given his estimate that 85 percent of visitor volume in Orlando is from out-of-state or out-of-country people, with theme parks being a mostly fixed-cost business.

S&P Global Ratings analyst Naveen Sarma on Friday also weighed in on the financial impact of the virus on Disney. "The global coronavirus pandemic continues to expand within the U.S., leading to live event suspensions and cancellations, and government-imposed bans on travel and public gatherings," he wrote. "This will have a negative effect on sporting events, concerts, theatrical events and film releases."

Said Sarma: "While we are uncertain as to the long-term economic impact of this pandemic, we believe there is increased risk to our 2020 forecast for Burbank, Calif.-based The Walt Disney Co. and for the company's ability to reduce leverage to the 2.5x threshold [by the end of fiscal year 2021 that] we have for Disney to maintain its 'A' issuer credit rating. While we are affirming our 'A' issuer credit ratings, as a result of this increased uncertainty, we are revising our outlook on Disney to negative from stable."

Disney's stock as of 10 a.m. ET Friday was up 6 percent at $97.36.