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Disney shares: more pain to come as profits drop?

While Disney has rebounded from its March lows, the outlook for the business is still tough.

Disney shares set for further declines?

Disney stock has rallied since the March low, but now looks at risk of a further decline. For a while, the fundamental news has begun to look better. For example, the company has managed to secure a $5 billion credit facility, providing it with much-needed cash that will help to shore it up in these more difficult times.

In addition, the previous chief executive officer (CEO) Bob Iger has taken a more direct role in leading the company through the current crisis. His departure earlier in the year sent shockwaves through Disney’s stock, but his return has been welcomed by investors.

However, whoever is in charge, the outlook for the group still looks tough. Parks and experiences provide the bulk of its profits, and with these closed for the foreseeable future a significant chunk of income has just disappeared. While the entertainment division, which produces films, has a slightly brighter outlook, it too is likely to see revenues fall sharply.

Disney+ division brings some respite

At least the Disney+ element is seeing growth. With so many consumers stuck at home, subscriber numbers have increased rapidly, passing 50 million subscribers by early April. Despite this, the division is not expected to be profitable for over three years, and while this might be brought forward as subscriber numbers rise, it will only provide a small bounce for income.

From a technical perspective, Disney has enjoyed a strong rally from the lows, surging from $80 to around $110. However, gains above $105 have been hard to sustain, with a possible break lower coming if the price drops below $102. Should this occur, then a decline to $90 or even towards the March lows at $80 cannot be ruled out.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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