Disney Stock Downgraded as Analyst Warns of "Unrivaled Earnings Risk" Due to Pandemic

Getty
Walt Disney Studios Los Angeles

"We believe the economic impact on the company will be longer than most anticipate, especially given the risks of a second wave of infections after reopening," writes MoffettNathanson's Michael Nathanson.

MoffettNathanson analyst Michael Nathanson on Monday downgraded his rating on The Walt Disney Co.'s stock from "buy" to "neutral" due to the novel coronavirus pandemic ahead of the Hollywood conglomerate's Tuesday earnings report and cut his price target by $8 to $112.

"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," he wrote in a report. "Our Disney downgrade is also an admission that we believe the economic impact on the company will be longer than most anticipate, especially given the risks of a second wave of infections after reopening."

Concluded Nathanson: "As economic pressures from COVID-19 become more evident, we expect to see further pressure on earnings, limiting the stock's performance for the near-to-medium term despite the company's strong position longer-term."

The analyst further reduced his earnings forecasts for Disney, explaining: "We do expect Disney to be given a pass from investors on fiscal year 2020 (which ends in September) earnings and to some degree fiscal year 2021 as the impact of the pandemic likely lingers. However, we are also reducing our fiscal year 2022 forecasts to factor in the additional risk and uncertainty about what a new normal will look like across most of Disney's businesses. Looking at those fiscal year 2022 forecasts, the risk-reward is just not that compelling."

Among Nathanson's reduced financial forecasts is a theme parks unit revenue drop of 33 percent from $26.2 billion to $17.7 billion this fiscal year, followed by a 1 percent decline next year and a 22 percent rebound in fiscal 2022 to $21.3 billion. The unit's earnings before interest and taxes (EBIT) will fall 65 percent this year from $6.8 billion to $2.4 billion before a 19 percent rebound next year and a 2022 gain of 64 percent to $4.6 billion.

For Disney's film unit, Nathanson forecasts a 20 percent earnings decline this year to $2.7 billion on a 23 percent revenue drop. And for its media networks division, he estimates a 4 percent earnings drop this year to $7.8 billion on a revenue fall of 3 percent.

"For more than a decade, we have been stalwart believers in the factors that make Disney different than the rest of the media pack," Nathanson concluded. "The company's leadership, strategic positioning, asset mix and brand equity have consistently delivered for their investors. … While Disney has the advantaged assets to win in this new world, we fear that the uncertainty of the present situation creates significant and unrivaled earnings risk for the foreseeable future."

Monday's downgrade is the latest in a slew of analyst reports painting a challenging longer-term picture for Disney.

Later on Monday morning, Morgan Stanley analyst Benjamin Swinburne in a report maintained his "overweight" rating on Disney's stock, but cut his price target to $125.

"We lower our near-term forecast due to a more conservative outlook on initial parks utilization and traditional TV headwinds," he wrote. "Content strength and growing direct-to-consumer distribution underpin our confidence in a recovery at parks and ability to navigate evolving film monetization."