The Magic Is Gone

Walt Disney was having a great run, and then Covid-19 hit, turning off its profit streams virtually overnight. Its theme parks are closed. Its ESPN channels have no sports to show. And there are no theaters for its blockbuster movies. A new streaming service, Disney Plus, is doing great with everyone at home, but it's far from profitable. Disney has said its direct-to-consumer business would lose $900 million this quarter.

On Monday, MoffettNathanson analyst Michael Nathanson downgraded Disney shares to Neutral from Buy.  It sounded like a tough call for the veteran media analyst: 

For more than a decade, we have been stalwart believers in the factors that make Disney different than the rest of the media pack.

Much of the pain centers around the theme parks. Nathanson is assuming they reopen on July 1, but he notes that might still be too optimistic. "We believe investors are underestimating the lagging recovery nature of Disney's theme parks," he wrote. He sees attendance at just 50% of prior levels later this year, with the parks' operating profit down 66% on the year.

Without sports, Nathanson is also worried about an acceleration in cord-cutting. How many people need cable TV if there are no sports to watch? 

Disney shares fell 2.2% Monday on Nathanson's downgrade. They're now down 29% this year, versus a 12% decline for the S&P 500. 

That sets up a crucial moment tomorrow afternoon, when Disney reports its fiscal second-quarter results. ESPN and the theme parks will lead the list of investor concerns. The stakes were already high for Disney's report, even before the Covid-19 shutdown. It's the first earnings call for Disney's new CEO, Bob Chapek, who replaced Bob Iger in late February.

Nicholas Jasinski has more here on what to expect from Disney's results