Summary
- Disney is a quality company, but the post-COVID earnings power is unclear.
- Disney+ is a bright spot for the DTC segment, but Hulu and ESPN+ face headwinds aplenty.
- The implied "core" Disney EV/EBITDA multiple stands at ~11x, though any disappointments on the DTC front or a lower for longer-type recovery could drive a de-rating.
Disney (DIS) is a stock that, on paper, is hard to bet against. The long-term IP-driven bull case is well-known at this point, but I'd caution against looking past the COVID-driven headwinds at this juncture, particularly since the pandemic will have a very significant financial impact across most of Disney's key segments (Parks, Studio, media) and advertising-related revenue streams. At the same time, a lower for longer macro/consumer spending outlook could also weigh on its near to medium-term earnings power.
"Core" Disney seems fairly valued at these levels - assuming a one to two year recovery, as well as an optimistic Netflix-like valuation for Disney+, "core" Disney is currently on offer for ~11x forward EBITDA, by my estimates. Pending clarity on a post-COVID world, I think investors should be cautious about underwriting a swift recovery in Disney's earnings power, especially in the aftermath of a rather abrupt management shake-up. Given the valuation also depends on DTC commanding NFLX-type multiples, any disappointments could result in a material de-rating, in my view.
Parks Set for a Troubled FY20, But Post-COVID Earnings Power Remains Unclear
Parks EBIT for 2Q20 provided some early indication of the extent to which COVID has impacted operations, with EBIT falling 58% YoY to $639m, with an ~$1bn impact from ~2 weeks' worth of closures. There is room for improvement on the cash burn front, though, as furloughs and other cost savings (total of ~$500m-$1bn) could bring cash burn to ~$2bn/quarter (relative to the current ~$3bn opex run-rate).
Source: Form 10-Q
Though Disney has reopened its Shanghai park, the Chinese government will limit capacity to ~30% of its normal operating capacity (~24k a day) to ensure proper safety and prevention procedures, with advanced reservations implemented to limit guest density. The difference in the "before" and "after" is stark - with face masks and strict social distancing, it certainly marks a "new normal" for the Disneyland experience.
Source: Head Topics
If there was one thing clear from management's commentary on the Parks business on the 2Q20 call, it was the limited visibility into both the timing and the conditions under which Disney can reopen. Even once parks reopen, however, a full recovery to pre-COVID attendance will likely be a lengthy process, with a margin recovery lagging further behind. Given we are in the midst of a global recession that looks set to last into FY22 in a base case scenario, and likely FY23 in a more pessimistic case accounting for a COVID resurgence, I can't help but adopt a rather bearish view on the Park segment's prospects.
