Here’s My Latest Update on Walt Disney

Not long ago, I was pumped about Walt Disney Co. (DIS).

On April 13, I said Walt Disney was one of the economy’s most attractive “reopening stocks.” At the time, shares sat a little north of $185 per share.

At the time, analysts expressed optimism about all things Disney.

People cheered the reopening of parks. Its Disney+ streaming service had reached record subscription levels. And its portfolio of hotels, cruise ships, restaurants, and film franchises appeared poised for a big bump in consumer spending.

Unfortunately, those catalysts didn’t deliver in late April and early May.

Since April 13, DIS stock has pulled back.

It is trading under $169 per share. What happened?

And, more importantly, what should you do with DIS stock?

I’ll answer both questions.

Macro and Micro Headwinds

Walt Disney recently reported fiscal second quarter earnings.

When discussing the company’s state, it’s always best to go with its most public report. We can expand into broader macroeconomic numbers to determine the headwinds or tailwinds facing the company.

During the bulk of the COVID crisis, Disney had to rely on its digital streaming services to bolster its bottom line. The company owns a stake in Hulu, 100% of the ESPN+ service, and complete control of its Disney+ franchise.

Keep in mind that Disney+ launched in November 2019, just five months before the crisis hit full swing. Its swift growth was nothing short of remarkable.

The company added subscribers in 2020 at a breakneck pace.

Its current subscriber levels are well above initial projections from its launch by several years. However, breakneck growth fuels expectations for further breakneck growth.

When the company reported its second-quarter results, Wall Street analysts anticipated that its subscriber base would hit 109.3 million.

The figure came in at 103.6 million. Yes, that was lower than Wall Street’s lofty goals, but the company showed stronger growth. However, investors should keep in mind that Disney+ totaled just 33.5 million subscribers at the same point in 2020.

I think that Wall Street largely gave a pass on the subscriber tally.

The bigger concern was the fact that its Disney+ pricing fell to $3.99 per use each month. That figure is down from the $5.63 generated during the same period last year. That’s a 29% decline.

Although Disney attributed the decline to a new service launch in India, potential investors should look for this figure to rebound as a factor in any decision to add the stock to a portfolio.

I say “potential investors” because, as of last week, TradeSmith Finance is more cautious about DIS than it was last month. I’ll explain this in a moment.

Park Numbers and Macro Numbers

Disney beat earnings per share expectations for the quarter. Its $0.79 per share was nearly triple the figure expected by analysts ($0.27 according to Refinitiv).

However, revenue fell short of expectations.

The company registered $15.61 billion in revenue; Wall Street expected $15.87 billion. While the Disney+ figure drew the headlines, the reopening of its parks has lagged. 

Disney said that its parks, experiences, and products division saw a 44% decline in revenue to $3.2 billion. Obviously, we can blame COVID-19. Disney’s major parks either shut down or required capacity limits.

In addition, its cruise ships and guided tours are suspended.

It’s hard to generate revenue when your doors are shut. And though the company did reopen two of its California-based parks (including Disneyland) at the start of May, recent ticket sales didn’t count toward the second quarter. We’ll need to wait until the next earnings report to determine whether customers are spending money.

For now, we can look for clues. We can start by looking at the broader spending habits of Americans. Right now, inflation is on the rise. The cost of everything from butter to a used car is surging.

Meanwhile, the U.S. Commerce Department just reported that retail sales for April came in lower than expected. U.S. retail sales came in flat for the month while economists had a consensus forecast of a 1% increase year-over-year.

This should give many retail, services, and travel companies pause.

Spending is not trending in the right direction. In March, consumer retail spending was robust due to stimulus checks and improved consumer confidence.

The 10.7% jump two months ago was the sharpest March increase since 1992.

Wait, Americans Aren’t Spending?

After seeing that April retail figure, I did some digging to understand better why the number is now flat.

A deep dive through multiple pages of Google searches, Wall Street reports, and the hundreds of emails I receive a day ultimately revealed an interesting report.

It came from the Peter G. Peterson Foundation, established by the man of the same name. He was the Secretary of Commerce during the Nixon administration and a co-founder of the Blackstone Group, one of the world’s most prestigious private equity firms.

The company released a report on May 14 that tracked the spending habits of Americans in the wake of the American Rescue Plan. This plan included $850 billion in Economic Impact Payments to citizens.

The goal of such stimulus efforts was to help Americans make ends meet.

Congress wanted Americans to spend this money and pump it back into the economy. The three rounds of direct stimulus primarily targeted lower- and middle-income Americans.

During the first round, 74% of recipients put their stimulus check to work on expenses like “food and rent,” according to the Peterson data. That figure fell to 22% in the second round and just 19% in the third round.

According to the Peterson Foundation, more Americans chose to use that money to pay down debt or threw it into the market or savings account. In fact, during the third round, 49% of respondents said they used the money largely for debt purposes, while 32% said they had saved it.

This should raise some questions about the reopening trade. While I’ve been bullish about the “reopening” trade for the U.S. economy, I want to make sure that I live by the warnings I made recently about confirmation bias.

This is negative news that requires greater investigation into the spending patterns of Americans heading into the summer.

And it could present a challenge for a company like Walt Disney, which is the ultimate reopening company, given its portfolio.

Urge Caution

As I noted above, Walt Disney is no longer in the Green Zone of TradeSmith Finance. The stock fell into the Yellow Zone six days ago, and it currently maintains a Red Zone stop loss of $157.32.

Investors who own the stock should maintain that Stop Loss and continue to monitor the situation. Anyone looking to purchase the stock should wait for the stock to move back into the Green Zone before making their move.

I’ll be sure to include a quick mention if and when Disney makes that move.

I’ll be back tomorrow to discuss Cathie Wood and a few key lessons on what NOT to do if you’re on the losing side of a technology trade.

Enjoy your evening.