Wall Street analysts are starting to forecast the damage to Disney's business from the coronavirus and it could drag into next year
- Disney is one of the media companies most exposed the impact of the coronavirus because of its large theme park and theatrical businesses.
- Wall Street analysts at Bernstein and Rosenblatt Securities have started crunching the numbers to figure out how much of a hit the company could face from the outbreak.
- Its usually stable theme-park business could be at risk this year if Disney is forced to close its parks worldwide for a few months.
- Disney's streaming services could theoretically benefit from more people staying at home, but they're so new that it's hard for analysts to estimate whether that will play out.
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Wall Street analysts are crunching the numbers to figure out how much the coronavirus could impact Disney.
The media giant, which made 38% of its revenue from parks, experiences, and products in 2019, has been forced to shut down some of its fastest growing theme parks, including its Shanghai location, as the coronavirus spreads. The virus is also threatening the box-office performance of Disney films, like Pixar's "Onward" and the upcoming "Mulan," "Black Widow," and "Jungle Cruise."
No one knows how long the outbreak will hang over Disney and the broader economy. But here are some of the back-of-the-envelope calculations that analysts are using to estimate the outbreak's impact.
Disney may share more details on the impact of, and its response to, coronavirus during its investor day on March 11.
Disney's usually stable parks business is most exposed to coronavirus
Disney's usually stable parks business, which contributed roughly $6.8 billion in operating income in 2019, is its most exposed to the threat of coronavirus.
Three of the company's theme parks, including its locations in Shanghai, China; Hong Kong; and Tokyo, Japan, are closed because of the virus.
The Shanghai and Hong Kong parks, which Disney operates, are estimated to risk:
- $530 million in segment operating income during the quarters ending in March and June, based on Disney's guidance.
- $140 million in segment operating income for each additional month those parks remain closed, estimated Rosenblatt Securities in a February 26 note.
It's a waiting game to see whether Disney's parks in France and the US will have to close as well.
Rosenblatt estimated the impact those park closures could have, using Asia as a baseline for a France closure and 2017's Hurricane Irma, when Disney World was shuttered for two days, as a guide for the US:
- Disneyland Paris: $35 million in segment operating income per month.
- Disney World and Disneyland: More than $50 million in combined segment operating income per day.
It's less a question of if the US parks will close and more a question of when and for how long, as well as how attendance quickly attendance will pick back up after the parks reopen, analysts at Bernstein wrote in a March 9 note.
The Bernstein analysts estimated:
- Base case: Worldwide closures for 45 days; quarterly growth declines through the end of this fiscal year.
- Lower segment income, before interest, taxes, depreciation, and amortization, through fiscal year 2021.
- Worst case: Worldwide closures for 60 days; quarterly growth declines through the first half of next fiscal year.
- Lower segment income, before interest, taxes, depreciation, and amortization, through fiscal year 2022.
Bernstein's estimates also include other aspects of Disney's parks, experiences, and products division, like its cruise lines. The virus has spread on at least two cruise ships, not operated by Disney, since the outbreak began.
"Certainly the COVID-19 [virus] will severely dampen demand for cruises in the near-term, even if those ships continue to operate," the Bernstein analysts wrote.
The studio business could also take a hit if theaters close in more international markets
Disney's studio business could also take a hit if movie theaters in more regions close. Theaters in China, Korea, France, and Italy are currently closed.
Analysts at both Rosenblatt and Bernstein expect any impact on Disney's studio business to be short lived. Bernstein estimates the spread of coronavirus could lower the studio segment's income, before interest, taxes, depreciation, and amortization, by 19% this fiscal year.
The bigger, long-term question is whether the coronavirus, especially if followed by a recession, could drive people away from movie theaters in greater numbers.
The biggest threat to Disney's media networks would be a recession, spurred by a coronavirus pandemic
Analysts don't seem to expect coronavirus to impact Disney's media networks much, unless the outbreak spurs a recession.
Advertising spending generally declines during a recession, and analysts have been anticipating that the next recession could also speed up the cord-cutting trend. When money is tight, expensive cable packages could be one of the first things customers cut, given the plethora of streaming alternatives out there.
Disney, of course, has been preparing for this with the launches of its Disney Plus and ESPN Plus streaming services, and by taking control of Hulu. But the company's traditional media-network segment still brought in $7.5 billion in operating income in 2019.
Bernstein anticipates:
- Base case: Quarterly advertising growth slows by a few percentage points this fiscal year.
- Worst case: Quarterly advertising growth slows through the first half of fiscal year 2021, and affiliate revenues decline faster as more subscribers cut the cord.
Disney's streaming business would likely be better off than other segments, but it's too new to tell
Analysts at Bernstein didn't estimate what could happen to Disney's direct-to-consumer and international segment during the coronavirus outbreak. There's so much uncertainty around the business that it's hard to tell.
In theory, Disney's streaming services, like Disney Plus, could benefit from people staying home and looking for cheaper alternatives to television. But, Disney Plus is so new, having launched in the US and a few other markets in November, that it's unclear if that scenario would play out.
Disney's ad-supported platforms, including ESPN Plus and Hulu, could also be at risk during a recessionary downturn in ad-spending.
"Given all the uncertainty that already exists, we have no conviction on whether the incremental positives offset the negatives, or vice-versa," the Bernstein analysts wrote. "Hence, we leave our forecast and valuation unchanged."