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Disney: is a return to earnings growth a fantasy?

The media giant has had to delay films and close its parks – but it has seen strong streaming figures for Disney+
Disney: is a return to earnings growth a fantasy?

Walt Disney (US:DIS) has delayed the release of major blockbuster films because of the coronavirus crisis – from the new Avatar and Star Wars movies to the highly anticipated Mulan remake. The latter hasn't even been put back on the schedule yet. This blow to revenue will be compounded by the closure of several of Disney's eponymous theme parks in the third quarter, which account for the lion's share of its top line. True, the media giant's new streaming service Disney+ might serve as a bright spot. But as things stand, the group's third-quarter earnings do not seem to be shaping up for a pretty picture on 4 August. What are the key points to look out for next week?

IC TIP: Hold at $116


1. Blockbuster bills

Disney’s movie-making Studio Entertainment business generates about 16 per cent of total turnover. But delays to blockbuster titles will dent this segment. Take Mulan, the release date for which has already been moved around a number of times. It could cost the group $1bn (£0.77m) in revenue this year, if Disney's last live-action princess film remake Aladdin’s box-office sales are anything to go by. 

Disney is not alone. Warner Bros movie studio owner AT&T (US:T) has pushed back the release of Hollywood director Christopher Nolan’s new title Tenet, and the company booked a $510m charge in part because of a hit to advertising revenue and the closure of cinemas. Disney faces the same risk - especially with $17.9bn worth of accounts payable in the last quarter. The group books sales connected to the licensing and advertising around its content - but ultimately they depend on Disney’s ability to stick to its release schedule. This has rarely been a problem before - but with the virus delaying production and film releases, these accounts might not be easy to collect and could turn into a sizeable impairment charge that trips up profits this quarter.  

Practically speaking, Disney also faces the fallout from a pause in production. This will affect the company’s ability to put out new content - for Netflix (US:NFLX), a lag is anticipated until 2021. Investors will be on the lookout for a sign as to when Disney will be able to revitalise its production plans. 


2. Theme park reopenings

Theme parks are not the easiest environments to safeguard against infection. Indeed, an amusement park in Japan has asked its visitors to scream inside their hearts on roller coasters, to protect against the risk of spreading coronavirus. Disney has not gone quite so far; but its reopened parks do not look the same as they did before. All guests over the age of two are required to wear face coverings and at some sites visitors are subject to temperature checks before they enter. 

The next quarter’s results will reveal the impact of reopening some of Disney's international parks, including Shanghai and Hong Kong – which is likely to have softened the 10 per cent blow to sales that it experienced in the three months to March. But the key question centres on long-term profitability: “If you’re opening at 30 per cent capacity – previously when the park was shut, you had no revenue but you also had pretty much no costs,” says Ben Barringer, an equity analyst at Quilter Cheviot. 

It is worth noting too that Disney’s deferred revenues, which comprise holidays that have been booked but not yet paid for, stood at 7 per cent of 2019 turnover. A loss here will likely contribute to a dip in overall profits. 


3. Streaming numbers

Market leader Netflix has made leaps and bounds in subscription growth since lockdowns started – and investors will be watching closely to see if Disney has had similar luck. “Longer term, as a premier media company, the whole shift to streaming is a fantastic opportunity for them,” says Hugh Grieves, who co-manages the Miton US Opportunities fund – a vehicle that counts Disney among its top 20 stocks. 

The group’s new streaming platform Disney+ posted impressive growth in the last quarter – reaching 54m subscribers by the start of May. But if Disney has followed the same trajectory as Netflix, it is likely to face the same challenge this year. That is, demand may well have been pulled forward from later in 2020 – which means that subscription growth could decelerate, especially as lockdown restrictions ease.