Disney has been through a lot of volatility this year, falling by 42% from $148 in the initial days of 2020 to $86 in March end 2020 due to the increasing effect of the coronavirus outbreak which led to a sell-off across worldwide equity market. Investor sentiments took a U-turn and improved over current weeks as the US government declared a list of measures to keep businesses going which helped Disney stock to recover by 37% and reached $118 by 25th May 2020. However, the current price of Disney stock is less by 20% than the level which was at the beginning of the year 2020 which implies that Disney stock has recovered but only partially as the crisis is still prevailing in the market.
The rise in the stock price of Disney in the past 2 years is due to the rise in the revenue by Disney in the year 2017-2019, the reason being the acquisition of Fox and consolidation of Hulu, which was partial, offset a decline of 2.4% in net income margin that was from 16.3% in 2017 to 15.9% in 2019 because of the expenses related to the acquisition and higher interest expense. 9.9% growth was seen in EPS from $5.73 to $6.30 in the year 2017 and 2019 respectively as there was an increase the outstanding shares. The growth in EPS was again highlighted by a rise of around 26% in Disney’s P/E multiple from 18.2 times to 23 times in the year 2017 and 2019 respectively, this was significant because of higher growth expectations from the market result of the acquisition of Disney with Fox and launch of its streaming providing Disney+ in the end of 2019. Although, there was a decline in P/E multiple in 2020 which is currently at 18.7 times which is comparatively still higher than 2017 which was at 18.2 times. The outbreak of the pandemic was the reason behind the decline in 2020.
Impact of Covid-19
As the virus has overtaken all the major cities leading to their lockdown, a slowdown in economic and industrial activity can be observed. In January, after the announcement by the World Health Organisation about the global health emergency due to COVID-19, Disney’s stock declined by 14.5% since then. The continuing lockdown in the major cities and economic downturn had negatively impacted Disney’s parks and resorts segment which has virtually gone through a complete shutdown. In Disney’s total revenue, Park and resorts segment has seen its share which surged in the past 5 years from 31% to 38% in the year 2014 and 2019 respectively which is magnifying the impact of the current pandemic on Disney’s top line. Disney’s traditional media and advertising income also expected to drop due to its lower spending power. The halt in the film shootings and releases, Disney’s studio business is also impacted, also there are no proven advantages from the acquisition of Fox in 2020 yet.
After observing the Q2 2020, with only a partial effect of the lockdown, it can be said that the situation can get even worse with degradation in the performance of parks and resorts and media networks by Q3 2020. Disney stock is expected to see volatility by its Q3 results if there are no signs of containment of the virus in June 2020 by its Disney+ performance which has been strong since its launch. On the other hand, if there are any signs of virus containment, Disney stock is expected to see a marginal upside with the market probably to have patience before they can see a full recovery to January 2020 stock level.