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There are no fireworks over Cinderella Castle these days, and yet investors remain captivated by Walt Disney Co. Are they caught up in fantasy?
The whimsical palace overlooking Disney’s Magic Kingdom in Orlando, Florida, has long stood as a symbol of the company and its status as both a source of enchantment and an impenetrable fortress in the entertainment world. Like the castle, Disney is well built, stately and admired, and it’s surrounded by an ostensibly protective moat. But much has changed this year. Operating profit — normally driven by the company’s theme parks and cable-TV networks such as ESPN — plunged 98% in the three months through June 27 from a year earlier as the Covid-19 crisis took aim at every single one of Disney’s lines of business.
Despite that, investors foresee happily ever after. They value shares of Disney at 44 times forward earnings estimates. That’s a 75% premium to the S&P 500 Index’s average earnings multiple. It’s also rich by Disney standards; the stock price has had an average multiple of just 20 over the last five years.
Comcast Corp at least has one stable business — broadband internet — but it’s left with a price-to-earnings ratio of only 16. Meanwhile, profit projections for Disney look like this:
Translation: Investors are such firm believers in Disney’s prospects that they’re willing to pay now for 44 years worth of potential earnings. It’s simply remarkable considering all that Disney is up against. A company whose revenue is directly tied to packed public venues such as movie theatres, theme parks and sports arenas has been largely inoperable for much of the year.
The planned expansion of its cruise-ship fleet has been put on pause. Movie and streaming projects also were halted as, for a time, were sports. It’s not clear what any of these revenue sources will look like after the pandemic, which may have lasting effects on society and consumer behaviour. And Disney is facing all of this with new leadership.
Even now, movie theatres don’t have enough releases or patrons to justify staying open. And while Disney World is back welcoming visitors (with crowd limits), the company said in August that it wasn’t seeing as much of a rebound as expected.
A recent Morning Consult survey found that 42% of US adults wouldn’t feel safe visiting an amusement park even six months from now.
—Bloomberg