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Walt Disney - Coronavirus takes $1.4bn off quarterly profit

Sophie Lund-Yates, Equity Analyst | 6 May 2020 | A A A
Walt Disney - Coronavirus takes $1.4bn off quarterly profit

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Walt Disney Co Common Stock

Sell: 176.01 | Buy: 176.02 | Change -0.25 (-0.14%)
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Disney's revenues rose 20.7% in the second quarter to $18.0bn, boosted by the acquisition of Twenty First Century Fox (TFCF). However, net income in the quarter fell 91.3% to $475m, with total operating income from the group's operating segments down 36.7% to $2.4bn.

The group estimates coronavirus has knocked as much as $1.4bn off operating profit in the quarter, with Parks, Experiences and Products being the worst hit division.

The group has suspended its half year dividend to preserve cash.

The shares were broadly flat in pre-market trading.

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Our view

The extent of the damage from the current crisis is unknown. One thing's for sure - Disney is entering uncharted territory.

Profits were already struggling, because of costs associated with the Fox deal and launching Disney+. Now the gates to theme parks, resorts and cruise liners are shuttered. It comes as the group continues to splash the cash on new attractions and merchandising and licensing is being disrupted too.

Networks has also been caught up in the current turmoil. The division is exposed to advertising trends, and a serious economic downturn, which would see revenue in this area suffer. ESPN in particular is struggling with the cancellation of almost all sporting events.

Overall, the visibility over future earnings in Disney's most important divisions is seriously impaired. Now more than usual we'd encourage investors to take a long term view.

This all comes at a time when the balance sheet looks a little stretched. Last year's $71bn acquisition of Twenty First Century Fox loaded the business up with debt, and that reduces the group's flexibility and ability to wait out the storm. Mega mergers come with a lot of execution risk as it is, so this isn't ideal. We're comforted by the fact Disney has access to substantial funds, which will add a layer of protection. But remember even the biggest resource pile can dwindle in the face of poor cash flow, and servicing interest on debts can become a more difficult task.

It's not all doom and gloom though. Disney still holds plenty of long term potential in our view, perhaps best demonstrated by the recent success of Disney+. The new platform helps the group make the most of a world class back catalogue of content, helped this quarter by the fact millions of us are confined to the couch. But this area isn't expected to be profitable until 2024.

Disney's unparalleled stable of copyrights and brands can't be overstated, and will hold it in good stead in the long-run. Our feeling is coronavirus is a bump in the road, not a derailing of the investment case. The extent of the damage is hard to quantify until we know how long lockdowns will go on for, and how quickly the economy recovers. A no-expense-spared trip to Disney isn't a priority when disposable incomes are squeezed.

A price to earnings ratio of 27.4, despite a 27% share price fall since mid-February, means there could be further ups and down from here if conditions worsen.

Second Quarter Results

Operating profits rose 7% in the Media Networks division to $2.4bn, and revenues increased 28% to $7.3bn. That reflects growth in Cable Networks and Broadcasting, helped by the TFCF assets. Profit growth was largely offset Broadcasting, helped by the TFCF assets. Profit growth was largely offset by Cable Networks thanks to higher programming and production costs at ESPN.

In Parks, Experiences and Products revenues down 10% to $5.5bn and operating profit falling 58% to $639m. That was driven by the closure of domestic parks and resorts, cruise line business and Disneyland Paris in mid-March, while parks in Asia and resorts were closed earlier in the quarter. Costs were also higher because of new attractions, including Star Wars: Galaxy's Edge.

Direct-to-Consumer & International saw operating losses increase from $385m a year ago to $812m this year, reflecting the costs associated with the launch of Disney+ and consolidation of Hulu. However, revenues in the division rose from $1.1bn to $4.1bn with the group now boasting 33.5m paying Disney+ subscribers, 7.9m ESPN+ subscribers and 32.1m Hulu subscribers at the end of March.

Studio Entertainment saw operating profits fall 8% to $466m.

Free cash flow in the quarter fell 30% to $1.9bn while net debt was broadly flat at $41.1bn.

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