Disney’s streaming changes have ‘built a big enough life raft’ to get through pandemic, analysts say as stock spikes


Walt Disney Co.’s shares spiked to gains of 10% and more Wednesday, after analysts focused more on the media titan’s new plans for streaming than financial results that were destroyed by the COVID-19 pandemic.

“Despite long-term worries about cord-cutting, linear advertising, theatrical box office attendance and a possible new normal in consumer travel, Disney has accomplished what their peers have not: They have built a big enough life raft to get the Street’s attention,” MoffetNathanson analyst Michael Nathanson wrote in a note Wednesday morning, while maintaining a neutral rating and raising his price target to $118 from $111. “And that attention helps override poor free cash flow generation, an unusually un-Disney-like stretched balance sheet and a relatively high valuation.”

That life raft was Disney’s
DIS,
+8.93%

attempt to leverage the one positive aspect of a portfolio pounded by the pandemic: Streaming. After detailing a quarterly loss of $5 billion that was transformed into an adjusted profit thanks to an accounting trick involving sports rights, Disney changed the conversation by announcing that it would allow consumers to watch its long-delayed “Mulan” film for $30 on Disney+ and will launch a new international streaming service under its Star brand.

Full earnings results: Disney shakes up streaming approach after losing nearly $5 billion due to pandemic

Analysts were quick to jump on the positive news and use it to wipe away their doubts about Disney’s other businesses.

“While COVID-related dynamics are likely to severely impact many of Disney’s businesses for some time, we are removing the 20% risk discount we have applied to our target price given what we see as increased visibility,” Credit Suisse analysts wrote while upgrading Disney to outperform from neutral and raising their price target to $146 from $116.

”With new CEO Mr. Bob Chapek now indicating an ‘innovative and bold’ further pivot to streaming, we expect Disney shares to be even more aggressively positioned as a streaming growth story (where investors have limited investment vehicles), and eventual COVID recovery play.”

Credit Suisse was one of at least three banks to upgrade Disney shares in the wake of the fiscal third-quarter earnings report, while many boosted their price targets, pushing the average price target on Disney stock from $128.48 to $132.09 Wednesday morning, according to FactSet tracking. Disney shares jumped more than 10% in the morning trading session, touching a high of $130.30 after closing Tuesday at $117.29.

See also: Disney will overhaul Splash Mountain ride amid criticism over connections to racist film — here’s the movie they chose

Much of the consumer chatter from Disney’s earnings involved the cost of “Mulan,” the live-action remake of a Disney animated movie that has been repeatedly delayed and will now be sold as a pay-per-view on Disney+ for $30. In explaining the difficult job of pricing the movie, Bernstein analyst Todd Juenger described it as “both shockingly high, and quite a consumer bargain, depending on one’s view.”

See also: Disney+ was the only plus for Disney as coronavirus slammed other businesses

“Certainly, $30 for a family is significantly less expensive than it would cost to take that family to see this movie in a theater. On the other hand, the marginal cost of watching some other movie on Disney+ or Netflix is ‘zero.’ Or framed differently, a consumer could receive almost a half-year of Hulu SVOD ad-supported, or Disney+ at the annual discounted rate, for the same price as watching Mulan once,” Juenger wrote while maintaining a market perform rating and raising his price target to $116 from $105.

While the “Mulan” move made big waves, analysts pointed out that Disney was adamant that the move was a one-off that will help get some needed revenue — Juenger pointed out that less than 15% of Disney+ subs would need to rent the movie for Disney to get its costs back. The bigger long-term move from the analysts’ perspective was the move for an international Star-branded streaming service similar to Hulu, Disney’s majority-owned North American streaming offering.

“The announcement lacked details, but we believe it is a significant development as it could be a driver in helping Disney achieve 200M global streaming subs, potentially in 2022, following reaching 100M in June,” Rosenblatt Securities analyst Bernie McTernan wrote while maintaining his buy rating and increasing his target to $145 from $135. “This would be a significant milestone in catching up to Netflix
NFLX,
-0.91%
,
as we expect Netflix to cross 200M subscribers during CY’20E.”

See also:Here’s everything coming to Netflix in August 2020 — and what’s leaving

Juenger described it as “a chance to replay the [2019] playbook,” referencing Disney’s launch of Disney+ last year. “Announce a new [direct-to-consumer offering]. Hold an investor day. Announce 5-year sub, ARPU, and profitability target. Collect a ‘Netflix revenue multiple’ against that guidance priced into the stock,” he wrote, before adding a cautionary view of that approach.

“Before we get too carried away, hold on, this is not quite the same. Disney/Fox TV content is not consumer-distinguished in the same way as the Disney+ brands. There will be sizable required investments, we believe the biggest of which will be, once again, foregone licensing. Not to mention accelerated decline of int’l linear channels ($5bn write-off in the quarter).”

Read: Walt Disney World tightens face mask policy after guests took advantage of loophole

Not all analysts were swayed by Disney’s streaming plans. Needham analyst Laura Martin reiterated her hold rating and summarized the questionable numbers Disney released Tuesday.

“Disney provided no forward guidance. COVID-19-related costs in Disney’s FY3Q20 were $3B, net of cost savings, with Parks’ adverse impact alone at $3.5B. … We remain on the sidelines until the structural economic impacts of COVID-19 on Disney are clearer,” she wrote.

Most other analysts, though, were happy to point toward new streaming initiatives as a potential savior for Disney.

“Disney management delivered a focused message of boldly pursuing additional global streaming video opportunities by leveraging STAR and Disney+ assets and a premium VOD window,” wrote Guggenheim analysts, who upgraded the stock to buy from neutral and increased the price target to $140 from $123.

“While it would be easy to maintain a cautious or skeptical approach to these initiatives, we expect the possible further expansion of streaming economics and core underlying investor confidence in Disney intellectual property make further share appreciation the more likely path from here.”

Disney Loses Nearly $5 Billion Amid Pandemic

Here’s why Netflix stock, now below $500, is going to $1,000





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Ford: Built Tough Against Near-Term Headwinds (NYSE:F)


Like most car companies, Ford (NYSE:F) has been having a tough time during the coronavirus pandemic. The lockdown and subsequent stay-at-home orders have dampened consumer confidence and halted automobile sales. However, the company is an American icon with a fantastic product and a loyal following. Despite the current short-term difficulty, I believe the company still has a solid, long-term future.

The company is facing some serious short-term headwinds because of the capital and fixed-cost-intensive nature of the business. Ford reported Q1 2020 net loss of $2.0 billion. Even more concerning is this net loss corresponded with a first-quarter free cash flow of negative $2.2 billion. In order to raise cash, the company tapped around $15 billion from its credit lines, issued an additional $8 billion in debt, and suspended its dividend. The company ended Q1 with $35 billion in cash.

The preliminary results for Q2 do not look promising either as total vehicle sales were down 33.3%. This is really bad news for the company as, like all automobile manufacturers, Ford’s margins are incredibly tight. Despite having $155.9 billion in sales, the company only has a 13.6% gross margin. Given the high fixed costs, a small decrease in sales would lead to a large decrease in the bottom line.

A possible silver lining though is that retail sales were only down 14.3% and retail sales for trucks were practically flat. The bulk of the loss can be attributed to the lack of industrial fleet sales. This is not surprising given that companies were conserving cash due to the pandemic and a lot of these purchases may have been pushed back or canceled. Basically this means that the Q2 2020 results will most likely look much worse than Q1 2020.

Investor presentation

Investor presentation

Ford’s future prospects look a lot better

Despite the present challenges, Ford is prepared to fire on all cylinders through 2020-2022. First and foremost, a new Ford Bronco is set to launch sometime in 2021 (with the unveiling in a few days’ time). The Bronco is a classic brand last seen in 1996. Ford is intending to tap on the nostalgia for the brand by highlighting its classic design such as its iconic horizontal grill. Similar to the Jeep Wrangler, an SUV Ford dedicated to taking on, the Bronco is an off-road-focused SUV. It will be mid-sized 4×4 and be a body-on-frame designed for rough roads. The Bronco will be offered in two- and four-door configurations along with a smaller variant called Bronco Sport.

2021 Ford Bronco: What We Know So Far

2021 Ford Bronco: What We Know So Far

Ford has been very clever in building hype for the reveal of the Bronco by partnering with Disney to get the message across all of its platforms. In fact, the Ford Bronco is among the most anticipated cars in 2020 according to Google search trends. Hype for the Bronco has been building up since this study was done and is close to the highest it’s been in anticipation of the launch. The company seems to have learned its lesson from the failed launch of the Explorer, so I do not expect any issues from this launch.

These Are The Most Googled Upcoming Cars Per State In America | Carscoops

Google Trends

Brian Moody, executive editor at Autotrader.com, said, “Jeep has been capitalizing on their heritage for decades, and not in name only. Jeep has proven that a genuinely capable adventure/utility vehicle with a nod to the past is what many people want. And that’s what the Bronco promises, if they can deliver an authentic product and, more importantly, communicate that authenticity laced with nostalgia, it will be a winner.”

Ford declares war with all-new Bronco as Jeep Wrangler demand spikes

Apart from the upcoming Bronco, Ford has hedged its future in the electric vehicle market. Threatened by upstarts like Tesla (NASDAQ:TSLA) and its Cybertruck, Ford has dedicated itself to building its own electric vehicle using its ever-popular F-150 as the base. The F-150 is the best-selling vehicle in America, and it’s quite clever that Ford used this as a way to introduce its entire EV line-up. This means that for the average truck driver, the design and feel of the electric vehicle version F-150 is far more comfortable than the somewhat weird-looking Cybertruck. Ford is targeting to have this car out by 2022.

Pick-up trucks are the company’s differentiator and its bread and butter. Ford and Lincoln both ranked in the top 5 in J.D. Power 2019 US Initial Quality. Ford pick-up trucks have a brand history built over the years when it comes to power and reliability. Given Tesla’s Model Y production quality issues, I do not view the company as a threat to Ford’s long-term dominance of the market.

The other potential threat to Ford from the EV side is the upcoming Rivian truck which is set to launch sometime in late 2020. However, Ford has hedged being displaced by a possible disruptor by investing $500 million into the car manufacturing start-up. Ford’s Lincoln brand continues to closely work with Rivian using its electric vehicle platform. This partnership allows Ford to have a sort of “hedge” should Rivian become the dominant EV technology.

Watch Ford F-150 all-electric pickup prototype tow over 1 million lbs of train carts – Electrek

Valuation

I feel that Ford is undervalued as the company’s price to book value is close to the lowest it’s been in five years. The current price to book ratio is 0.83x. Automobile manufacturing is a mature industry that is incredibly capital intensive. This deters new entrants from entering the industry and ensuring the incumbents’ dominance in the long term. While the stock has recovered from the lows quite a bit, it has not yet fully recovered from its price of $9.16 at the beginning of the year.

ChartData by YCharts
ChartData by YCharts

Among the big three car manufacturers, Ford also consistently has the highest gross margins. In a capital-intensive industry, having the highest gross profit margin gives you a substantial edge over your competition. However, there is room for improvement as Asian competitors like Toyota (NYSE:TM) and Honda (NYSE:HMC) have gross margins above 15%. Ford’s margin has been declining over the past five years. I feel confident that the company can improve its margins as it is undergoing an $11 billion restructuring plan in order to bring costs down and be more efficient. With the various possible tailwinds the company could have in the future, I believe the company is oversold and a reversion to a price to book value of 1 is probable. The company has a book value per share of $7.46 (which is my near-term target price as well). This implies a 25% upside from the current price levels.

ChartData by YCharts

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in F over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Caveat emptor! (Buyer beware.) Please do your own proper due diligence on any stock directly or indirectly mentioned in this article. You probably should seek advice from a broker or financial adviser before making any investment decisions. I don’t know you or your specific circumstances, therefore, your tolerance and suitability to take risk may differ. This article should be considered general information, and not relied on as a formal investment recommendation.





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The CEO who built Cisco into a powerhouse has a sobering coronavirus diagnosis: At least nine months of economic pain


John Chambers warns any economic uptick from coronavirus won’t occur until at least late fall, and a full recovery would likely happen until early 2021.


Silicon Valley sage John Chambers is usually a sunny sort. But COVID-19 has him expecting the worst over the next nine months to year.

The legendary tech executive-turned-venture capitalist predicts the health and economic crisis will take three to five quarters to run its course, and any economic uptick won’t occur until at least late fall. A full recovery would likely happen until early 2021, Chambers warned.

“Companies are running out of cash,” Chambers told MarketWatch in a phone interview Tuesday. “The next quarter is going to be ugly.” He cautions many companies will see revenue decline by half and, “only the strongest startups will survive.”

A self-described “realistic optimist,” Chambers is looking at the crisis through the lens as a businessman who has navigated through several financial downturns and as the son of two doctors. He sees the pandemic as a three-axis disrupter to the economy, health-care system, and global supply chain, with the travel and airline industries recovering much more slowly than retail and financial institutions.

But Chambers, who led Cisco Systems Inc.
CSCO,
-1.90%

as chief executive for 20 years until 2015 and is now a venture capitalist and adviser to 18 startups, also believes the crisis is an opening for innovative, bold companies. “For many, it will be like a second chance to do an IPO,” he says, citing pivots by Cisco in 2001, 2005, and 2008-9 to strengthen its business. He built the company from $1.2 billion in revenue, when he became CEO in 1995, to $47 billion in 2015 before sliding into the role of Cisco executive chairman for two years.

The bird flu pandemic of 2005, he said, led Cisco to develop TelePresence, one of the first videoconferencing products for remote meetings in 2006.

“Companies will either be destroyed or break away if they follow their North Star,” said Chambers, a leading proponent of the adoption of big data, artificial intelligence, 5G, and edge computing by all companies. “It’s time to reinvent or be left behind. And remember, great tech companies have emerged during economic crisis.”

During the course of the interview, Chambers mentioned Shake Shack Inc.
SHAK,
+2.07%

, Zoom Video Communications Inc.
ZM,
-7.47%

, and Delta Air Lines Inc.
DAL,
-0.35%

as examples of large businesses that have taken the necessary steps to transform operations in the digital age.

See also: CES 2020: Delta promises free Wi-Fi, looks to succeed where other airlines failed

Of course, the 2005 pandemic is a relative blip compared to the spread of COVID-19, which Chambers said will force many “companies to use this moment to make the transition to digital.” For more than a year, he has harped on the importance of Fortune 500 companies to remake themselves as digital operations or face extinction. The advent of COVID-19, he said, has only heightened the urgency and accelerated damage to many companies.

“Things will get worse before they get better — that is the realistic optimist in me speaking,” says Chambers, who has predicted up to 40% of the Fortune 500 and 70% of startups will no longer be around a decade if they don’t make the digital transition.

See also: Normally Sunny John Chambers is scared about the economy

His unease is echoed by nearly 40% of all venture capitalists, who believe the U.S. economy won’t be back to normal until April 2021-April 2022, based on a survey of 286 seed Series A founders and 114 venture capitalists by VC firm NFX this month.

The disproportionate loss of jobs will weigh heavily on the economy until the fall, when Chambers expects some signs of life in the economy. “There is no magical rebound,” he said. “I think the federal government, the Fed, central bank, and Treasury [Department] did an amazing job in reacting as quickly as they did.”

That, and the indomitable American spirit during trying times, give Chambers hope that the country will eventually emerge from COVID-19 stronger.

“There will be terrible pain and loss from all this, but we need to believe that in the darkest moment there is light yet to come,” he said.



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