LightShed Partners' Richard Greenfield initiates covering of the stock with a "neutral" rating, saying the Hollywood conglomerate's near- to medium-term earnings are "likely to be far lower than investors realize."
LightShed Partners analyst Richard Greenfield has developed a reputation for being bearish on Walt Disney, and his Wednesday report initiating covering of its stock with a "neutral" rating reiterates his position. After all, he used the headline "Disney’s Unique Vulnerability to COVID-19 Should Keep Investors Away."
Greenfield highlighted that Disney's stock, which had closed Tuesday above $106, reached an all-time high of $151.58 on Nov. 27, "following the incredibly successful launch of Disney+ earlier that month." Back then, Disney’s consensus earnings expectations for fiscal years 2020-22 were $5.49, $6.12 and $6.87, respectively. "With Disney trading at 48 times 2021 earnings per share and 28 times fiscal 2022 earnings per share, with both estimates potentially aggressive at this point, we are hard pressed to see why anyone needs to own Disney shares here," the analyst argued.
Greenfield discussed the coronavirus pandemic's financial impact on the Hollywood conglomerate. "While Disney's theme park will hopefully get back to normalized levels at some point, predicting that timeframe is nearly impossible and in the interim, Disney's media network businesses will worsen considerably."
With others on Wall Street recently discussing the early success of the Disney+ streaming service, Greenfield weighed in on that as well. "While Disney waited far too long to disrupt their cash cow legacy businesses, when they finally leaned into the future, the early success of Disney+ enabled investors to see a Netflix-like way for Disney to monetize their incredible array of content," he said. "Disney was able to shift the narrative from the many challenges facing their legacy assets (which plague not just Disney, but the entire media industry) to a rocketship called SVOD and best of all, Disney convinced investors to overlook the reality that as that SVOD rocketship accelerated, it accelerated the demise of Disney's core profit centers."
Concluded Greenfield: "Investors convinced themselves that Disney should trade at over 25 times earnings because earnings were understated by their SVOD investment, which never made any sense to us given aforementioned impact SVOD would have on their legacy assets. And then COVID-19 arrived and that debate became irrelevant."
The LightShed analyst emphasized that the global pandemic was negative for all traditional media and entertainment companies, highlighting that "TV advertising is collapsing, movie and TV production has stopped (there is unlikely to be even be a fall TV season), sports are on hiatus with no return date known etc."
However, Greenfield added: "Disney’s unique ability to monetize its intellectual property into so many other aspects of its business also becomes its critical vulnerability during and after COVID-19. This vulnerability means that Disney’s earnings power will be significantly reduced from how investors think about normalized earnings."
Greenfield predicted that Disney's earnings are "likely to be far lower than investors realize," forecasting fiscal year 2020 earnings per share of $2.10, compared with the Wall Street consensus of $2.76, followed by 2021 earnings of $2.22 per share (versus a consensus estimate of $4.56) and 2022 earnings of $3.81 a share (versus a consensus of $5.58).
