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Disney: And Yet Severely Undervalued

May 07, 2020 9:37 PM ETThe Walt Disney Company (DIS)96 Comments
Vincenzo Furcillo profile picture
Vincenzo Furcillo


  • COVID-19 damages are estimated to be as much as $1.4 billion, and the pain will likely last over Q3 as well.
  • Q2 damage is real, but the growth of the business should not be underestimated. Moreover, parks are starting to reopen, and sports events will eventually resume.
  • Disney is still generating high levels of cash, and its balance sheet is well-positioned despite the pandemic losses. Even if the pandemic lasts longer, costs will decrease.
  • Digital growth has significantly accelerated during the pandemic, and at current prices (under $100), Disney stock is very cheap.


Second-quarter earnings are painting the picture of a new Disney (NYSE:DIS), based primarily on digital content. COVID-19 damages are estimated to be as much as $1.4 billion, and the pain will likely last over Q3 results as well. In response to this business environment, the stock price crumbled and the company lost over a third of its value (-35%). Despite harsh business conditions, I believe Disney remains undervalued as the market fails to take into account the benefits of the business transformation.


The Q2 Damage

COVID-19 affected Disney since late January in Asia, and since March in Europe and America, when theme parks and retail stores were forced to shut down. COVID-19 infected what is the main business of the company - "Parks, Experiences and Products" - that at YE19 constituted 37% of total revenue:

(Figure 1 - Source: Author calculations from Disney Q2 FY2020 earnings data)

For the Parks, Experiences and Products segment, the revenue cut due to closures was approximately $1.0 billion, with a 58% decrease in operating income for the segment. However, the segment revenue decreased by only 10%, while costs continued to increase (+5%).

Repairing In the Works - Costs Reduction

“Costs for the quarter were higher compared to the prior-year quarter due to an increase at our domestic parks and experiences driven by expenses for new guest offerings, which included Star Wars: Galaxy’s Edge, the net cost of pay to employees who were not performing services as a result of actions taken in response to COVID-19, and inflation.”

Source: Disney Q2 FY2020 earnings data

As business was shut down abruptly, expenses for the new guest offerings were not offset by the expected ROI revenue. As parks stay closed for longer periods, these kinds of expenses will keep decreasing until the reopening approaches.

Moreover, the company

This article was written by

Vincenzo Furcillo profile picture
Top 100 financial bloggers on TipRanks.Risk officer with a focus on exponential growth and exponential decline. Options arbitrage and Blockchain technologies enthusiast. Follow to get updates on my latest research.V

Analyst’s Disclosure: I am/we are long DIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (96)

Dale Roberts profile picture
Any Disney Park North American opening may end up being the biggest medical nightmare/tragedy of the entire pandemic.

Maybe China goes first and shows the what will happen.

It would also be the scary earthquake ride/lesson for the rest of the economy.

Vincenzo Furcillo profile picture
Why do you believe so?

I see families with kids going to the parks at this stage. The mortality rate for those people is quite low (<0.X%). If we continue isolating individuals at risk, I actually believe reopening parks with precautious (like in Shanghai) won't be too much of a tragedy.

You have a point though, let's wait and see if the Chinese approach is working.

You can’t compare Disney with Netflix. I have seen so many clueless articles doing that just because of Disney plus. Disney plus streaming is less than 10% of the entire company. Netflix is 100% steaming. you wish but Disney will never get Netflix valuation, it’s too late and Content are very limited.
I would like to own this stock some day, but I question the wisdom of the Disney leadership when they are still allowing Kathleen Kennedy to remain as the head of Lucas Film. She is literally tanking that franchise and leaving billions on the table because she is going out of her way to alienate the fans to promote her personal agenda. I don't know why Disney articles never address that and why they don't question the leadership of the Bob's for allowing it to happen. Why does that not concern any one who is long this stock? This is a problem they can fix tomorrow.

Then we learn it was Kathleen's idea to base Galaxy's Edge on the sequel trilogy and not the Original Trilogy. The sequel trilogy characters don't resonate with the fans and that trilogy has no staying power. The merchandise collects dust on the shelves. When a major corporation is allowing one person to cause it to lose billions in revenues, I have to call into question the decision making skills of the leadership there.
Hopping Freights profile picture
ZERO insider buying at Disney. Absolutely zero. That speaks volumes right now.
craftbrewinfo profile picture
Bought some DIS a few weeks ago, then they deferred the dividend ( big no-no in my book). Not my usual kind of stock, figured to hold long term for some aplha and collect a few bucks in dividends

Sold this week making a few bucks and deployed into another great company from my watch list. Disney is a great company no doubting that, but I think I jumped the gun too early and as some other have indicated Q2 and Q3 results will be devastating. I think it drops further Well beyond the sub $100 where I originally bought. I will reconsider then
Brian Chilton profile picture
Looked up your bio and last articles. August 2019, Aurora Cannabis About to Explode stuck out, with its thesis that the international cannabis market was about to take off.

As far as Disney, your cash flow analysis is wrong. As but one example, even though they cannot broadcast live sports, they are still paying out 100% on the licensing fees to the relevant leagues, NCAA NBA MLB, who are not playing. Similar negative cash flow riddles the whole company. Management clumsily dodged the pointed question during the earnings call as to whether they could operate the parks profitably at reduced guest capacity, indicating they are prepared to operate parks at negative cash flow indefinitely. The DTC segment will not help where even before the current mess that segment was scheduled to be cash flow negative until 2023. All those choices may be right from branding and continuity perspectives, but it is highly innacurate to say Disney does not have cash flow issues.
Exactly @Brian Chilton Both parks and theatrical will be cash flow negative if the number of guests are too low. No live sports will accelerate cord cutting, and most cord cutters won't come back.
Dale Roberts profile picture
And obviously, I'm not going to Disney World. Ha.

Dale Roberts profile picture
There may be no filled stadiums or crowded venues until there is herd immunity or a very effective vaccine. Of course, they have not been successful in developing a vaccine for any coronavirus. And even the flu vaccine is only 45% effective (Bill Gates).

How long have they been working on flu vaccines? That does not instill confidence.

I would not take a rushed vaccine - normally they take 5 years to develop. I would not let my Mom take it.

If it's herd immunity, perhaps we are looking at 3, 4, 5 years or so, to see crowded venues. If folks have the courage to show up.

Even with all the press, this continues to be the Rodney Dangerfield of viruses.

Disney needs everything to go perfectly over next 6-9 months to successfully reopen parks,ships,restaurants and movie theaters. They need live sports for
ESPN. They need to be able to produce
Yesterday as our country attempts to
Start up again there were 36000 new cases and 3600 deaths the third highest
Total in the US since the pandemic hit our shores. The cases could simply be a function of more testing and the deaths could be an anomaly and reflect a lag
In that those deaths reflect infections that occurred weeks ago.
But those numbers are still alarming.
They are not good.
Enough said.
Todd Kenyon, CFA profile picture
you debunked your own theory. The data is GARBAGE. Testing rates are all over the map, and worse yet various states randomly dump deaths that are up to a month old into various days. Been rampant the last few days especially. % of tests positive (rapidly declining) is one useful measure. So are deaths by actual date of death. If you follow that data you will have a better outlook.
After this crisis and all the drama, when the dust settles, people will favor, at least for some time, core traditional and reassuring values, this will bring wind in the sails of Disney for sure...
Thanks, good article. Impressed by the cash generation, and enjoyed the Netflix comparison at the end.

You mention that change in accounting guidelines may push expensives from H1 to H2. I am not familiar with this change. Could you elaborate? I assume it pertains to all kinds of companies?
Vincenzo Furcillo profile picture
Thanks! @SilverViking

Regarding the change in accounting:

"At the beginning of fiscal 2020, the Company adopted new accounting guidance, which generally results in lower amortization of capitalized episodic television costs during network airings for shows that we also expect to utilize on our direct-to-consumer services. Compared to the previous accounting, programming and production expense will generally be lower in the first half of the fiscal year and higher in the second half of the fiscal year as the capitalized costs are amortized."

It results in a timing benefit shifting higher expenses to H2.. to my knowledge, it's specific to Disney
Thanks I really appreciate it, sounds company specific
Great! keep enjoying and losing money at the same time!
Not a good comparison. Netflix has a cost structure that is very difficult to replicate. The money Disney makes on its subscription is mostly lost from content fees.
RD2001 profile picture
What content fees are you referring to? Non-Disney content?
Paul Burrow-Newton profile picture
Fees to who? Its all Disney content. Its Netflix that had to pay Disney for its content.
If they just let Netflix or Hulu distribute the content, they would get free money because it costs them nothing. Running a streaming service is extremely expensive.
The happiest place on earth is....buying Disney in a couple of weeks at $80.
Mongo Lobo profile picture
And I'm going to buy LMT in a couple of weeks at $240.
Disney will have a fire sale at end of yr. to stay in business. Sugar coat everything, while you can, so you can try to regain your current 35% loss. DIS will get slaughtered at next ER. See you at $50 in July...$30 in Nov. Eventually walk street is going to dump everything bc they know companies like this will take 5-7 yrs to recover...if at all. The clock is ticking.
“DIS will get slaughtered at next ER”. Easy to say that considering we are halfway through the quarter and still in quarantine. 4/5 companies will be slaughtered with them.

5-7 years to recover? Disney is an amazing brand, you are living under a rock.
Depends alot on the reopen. The parks, cinemas, sports. Cinemas can always be redirected to online. Sports might start soon. Parks is 5050.
Disneyland Shanghai tickets are already sold out.
They have a handful of big name movies already made just waiting to be released.
Disney stores are still selling products.
Sports will be played again.
This: Disney P/E stands at 17, while Netflix's is 91, or 5.35 times Disney’s. Price-to-Sales shows the same differences, with Disney at 2.49 and Netflix at 8.59, or 3.5 times Disney’s.
@AtoZ Investing

And all irrelevant. Netflix growing rapidly and is not hampered by very costly legacy media.

Fox deal was a disaster for them. If not for Disney+ the stock would have really cratered, $50.
@Entreri So Disney+ is worth approx. half of the company’s current valuation? Cratered to 50 is nonsense
Quite possible since that is the only good section for disney this covid season.
Disney is a special company and they know how to make money all day. Disney is the only thing most parents have to appease kids at home or in the wild. Hopefully the parks aren’t a big drag but even if they lose $10B on parks they could find $20B in some random licensing deal. Disney owns a lot of IP. I agree with the decision to own it long term.
I'm sorry, on which planet is Disney generating a profit in any segment? Nl
On which planet is their entire business and ability to generate revenue long term affected by the flu that lasts a few months?
Are you sure the flu only lasts a few months?
Disney and Netflix has no direct comparison, if Disney + Hulu and ESPN+ bundle go international, will be amazingly competitive and popular, Disney has own studio production like Marvel , Pixar .... Netflix need to rely on third party to produce own contents, the cost will just go up
ESPN has no international rights. Hulu has no international rights. Disney+ is fighting this alone.
nerd_rage profile picture
DIS needs to make original content for Hulu. For example, get FX producing original content exclusive to Hulu that will have the same appeal as HBO. Since DIS will soon be competing directly with HBO, that's an obvious need.

The streaming wars isn't about bringing content over from other outlets. Cable and broadcast are dying business models so don't look to them for content long term. Streaming is about original, exclusive content that people can't see anywhere else.

You want Mandalorian? There's one place for it. You want Witcher, Stranger Things, Tiger King? One place. That's the winning strategy because it motivates subscriptions. Reusing old content just doesn't have that drawing power.
Unemployment is out of control. So the parks will not generate enough cash to warrant then to open until next year, plus the public need to be vaccinated.
You can’t be this simple minded
Disneyland Shanghai tickets have already sold out...
Luck with that. That spirals in 18 months from 21,000,000,000 to 55,000,000,000 and the blown is clearly off the rose Kevin it’s overvaluation given historical norms. Count me out
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