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Why I'm in No Hurry to Purchase Disney Stock

It's been a great run since the financial crisis of 2008 to 2009, but now, the news for Disney (NYSE: DIS) can seemingly get no worse as of late. Disney shares are still up 150% from the market peak in Oct. 2007, but the stock has given up over 30% of its value year to date. CEO Bob Iger retired early, the theme parks and cruises are closed down, theatrical releases have been delayed, and sporting events are on hold. No wonder the stock is suddenly underperforming the market overall.

Granted, Disney is still one of my favorite stocks for the long haul. With its treasure trove of intellectual property and world-class resorts, plus an enviable media empire, shares will eventually come roaring back. I plan to begin accumulating a stake again -- more than likely later this year -- but I'm in no hurry to call a bottom quite yet.

Image source: Disney.

Not that diversified after all

Disney reports business in four segments, and as it turns out, it isn't quite as diversified as it may look at first. Granted, coronavirus -- or at least the global response thus far to the pandemic -- is an unprecedented situation. Investors should brace for at least a quarter, maybe even two, of losses the likes of which weren't even sustained during the Great Recession.

That's because a wide swath of business isn't operating right now. All six parks -- Disneyland and Disney World here in the U.S., Tokyo, Hong Kong, Shanghai, and Paris -- are currently closed. So are its hotels, cruises, and live events.

Disney will generate goodwill among its fans as it continues to pay its workers, but the large theme park and experiences reporting segment will lay the closest thing to a goose egg there is for a business so large. Merchandising -- mainly earned through licensing fees to partners such as toy maker Hasbro and video game maker Electronic Arts -- will be virtually the only source of income for the segment until the parks reopen.

Segment

Fiscal 2020 Q1
Revenue

Fiscal 2020 Q1
Operating Income

Parks, experiences, and products

$7.40 billion

$2.34 billion

Media networks

$7.36 billion

$1.63 billion

Studio entertainment

$3.76 billion

$0.95 billion

Direct-to-consumer and international

$3.99 billion

($0.69 billion)

Data source: Disney.

One glimmer of hope could be the media networks business as stations such as ABC and the acquired Fox channels are still running. However, advertising revenue tends to take a hit during economic downturns. There's also the indefinite hiatus many professional sports leagues are taking, which is terrible news for the ESPN crown jewel.

A similar situation exists for the studio entertainment segment, which primarily makes money through box office sales for theatrical releases. Disney had to end its run of Pixar film Onward, which will likely generate a loss due to advertising and distribution expenses. Other releases from now until May, including the live-action Mulan and Marvel's Black Widow, have been delayed indefinitely because movie theaters are closed.

Even when dates are rescheduled, it's possible audiences might be gun shy returning to the silver screen, not to mention the other slate of films from rival studios that will be competing for audiences post-coronavirus. Investors can hope for home movie release sales to prop up the numbers.

What about Disney+ and Hulu?

The one area that's sure to make a real splash is Disney's direct-to-consumer segment, comprised of streaming services Disney+, Hulu, and ESPN+. Streaming got a shot in the arm thanks to most households being stuck at home, so the subscriber numbers -- which sat at 63.5 million worldwide during the last quarter -- are almost certain to go up. As this is a long-term project, though, operating losses are to be expected again this year.

Also of note is Disney's balance sheet. After purchasing Fox for $71 billion in early 2019, a move largely seen as bolstering the company's library of content for its streaming ambitions, debt has soared. Total debt including the currently due portion of the long-term total was $48.1 billion at the end of 2019. Cash and equivalents, on the other hand, sat at $6.9 billion. While I think Disney will be fine managing its liabilities, the timing for the COVID-19 outbreak certainly could have been better.

Thus, at the moment, the deck looks stacked against Disney. The extent of losses across the business are still unknown, and the time frame for the company's most important segments getting back on track are still up in the air. The stock could very easily continue to slide, so until there is some clarity, which likely won't happen until the next quarterly earnings report, or until Disney parks fire up operations again, I'm not buying.

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Nicholas Rossolillo owns shares of Hasbro and Walt Disney. The Motley Fool owns shares of and recommends Hasbro and Walt Disney. The Motley Fool recommends Electronic Arts and recommends the following options: long January 2021 $60 calls on Walt Disney and short April 2020 $135 calls on Walt Disney. The Motley Fool has a disclosure policy.


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