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Walt Disney - third quarter hit by lockdown closures

Emilie Stevens, Equity Analyst | 5 August 2020 | A A A
Walt Disney - third quarter hit by lockdown closures

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Walt Disney Co Common Stock

Sell: 176.91 | Buy: 176.95 | Change -6.54 (-3.56%)
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Disney reported a 42% fall in third quarter revenues, to $11.8bn. That was driven by big declines in Parks, Experiences & Products as well as Studios - all impacted by lockdown restrictions.

$5.0bn of impairments, mostly to the international broadcast business, reflecting the ongoing shift away from TV channels to streaming, meant the group posted a $4.8bn loss before tax in the quarter. Both revenues and profits were lower than analysts had expected.

The shares were broadly flat in after-market trading.

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Our view

As the fallout from the crisis rumbles on the extent of the damage remains unclear. One thing's for sure - Disney's in uncharted territory.

Profits were already struggling because of costs associated with the Fox deal and launching Disney+. The pandemic has made matters worse, disrupting all of the group's divisions, bar Disney+. Theme park gates and cruise liner gangways have been shuttered, and studios forced to close during lockdowns too - halting new productions.

Networks has also been caught up in the current turmoil, exposed to the widespread advertising cuts, as companies reign in non-essential spend. That's been more than offset by lower costs in the recent quarter. But as sports and other shows return to our screens costs will rise, putting more pressure on profits.

As things stand 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 longer 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. Adding financial pressure as the group has to keep up with interest payments, despite lower earnings, not to mention execution risk that comes with mega mergers. For now we're comforted by the fact Disney has access to substantial funds and despite the scale of the disruption was able to remain cash flow positive this quarter.

For all that Disney still holds plenty of long term potential in our view, perhaps best demonstrated by the success of Disney+. The new platform helps the group make the most of a world class back catalogue of content, boosted this year by the fact millions of us are confined to the couch - although the business isn't expected to be profitable until 2024.

The power of 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 remains that coronavirus is a bump in the road, not a derailing of the investment case.

With economic disruption far from over, and Disney's parks threatened by further lockdowns, there's a lot of short term risk in Disney shares. A price earnings valuation which is significantly above the longer run average could be affected if disruption continues.

Disney key facts

  • 12m forward Price/Earnings ratio: 44.5
  • Ten year average 12m forward Price/Earnings ratio: 17.5
  • Prospective yield: 1.0

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third Quarter Results

Media Networks reported a 2% decline in revenues to $6.6bn, reflecting lower advertising revenues in both Cable Networks (home to channels like ESPN) and Broadcasting (which produces programmes including Grey's Anatomy). However, operating profits in the division rose 48% to $3.2bn, as the lack of sports and delays to filming meant programming costs fell. Broadcast also benefited from increased sales of its programmes.

In Parks, Experiences and Products revenues fell 85% to $1bn, as the majority of the group's parks and cruise liners were shut for the entire quarter. The division moved from a $1.7bn profit in 2019 to a $2.0bn loss this year.

Studios saw revenues fall 55% to $1.7bn, with operating profits down 16% to $668m. The closure of cinemas hit the division, with no major releases during the quarter, partially offset by the sale of assets to Disney+.

Direct-to-Consumer & International was the only division to see revenues rise, up 2% to $4bn, although operating profits losses widened from -$562m to -$706m. That reflects costs associated with the launch of Disney+, offset by better results from Star and ESPN+. The group now has 57.5m Disney+ subscribers, 35.5m Hulu subscribers and 8.5m ESPN+ subscribers.

Free cash flow improved year-on-year and remained positive at $454m. Reflecting improvements in working capital and lower investment spending.

Net debt of $41.3bn at the end of the quarter was in line with where the group was at the start of the year.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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