Shares of The Walt Disney Company (DIS) fell nearly 3% after analysts at investment firm Guggenheim Partners downgraded the stock over concerns about the company’s future earnings growth. Disney, which reports earnings on February 9, closed the trade at $155.44 on January 13. At the time of this writing, the shares are changing hands at $151.13.
key takeaways
- Disney shares are falling as investment firm Guggenheim Partners downgraded them to Neutral from Buy.
- The firm cited the threat of new COVID variants disrupting operations and the entertainment giant’s increased spending on content as reasons for its downgrade.
- Of the 17 analysts covering Disney, 14 still rated it Buy for 2022.
Why did Guggenheim lower Disney’s rating?
Guggenheim analysts downgraded Disney shares to Neutral from their previous Buy rating. They also lowered the company’s price target for Disney shares to $165 from $205 due to “broader business pressure.” Elements of this pressure include higher wages for workers and the threat of future COVID outbreaks affecting attendance at its Parks division.
Guggenheim also cited the entertainment giant’s increased spending on content as a reason for its downgrade. In a previous filing, Disney had said it plans to increase content spending by $8 billion, to $33 billion, in 2022.
Guggenheim stated that Disney’s current trading price, roughly 17 times its expected 2023 earnings, values the company close to its fair estimate. “While we think the worst of the overall bear case narrative is understood (digital growth challenges, park trend volatility and cost inflation), we still see equities close to fair value,” Michael wrote. Morris, an analyst at Guggenheim, in the note.
Is Disney still a buy?
After falling to a low of $96.60 during the onset of the pandemic, Disney posted 18% growth in its share price in 2020. The following year, however, was challenging. Subscriber growth on Disney Plus, which had driven almost all of its earnings during the pandemic shutdown, slowed. The new strains of COVID interfered with the company’s plans to fully reopen other business revenue taps, including its theme parks and theaters. As a result, the stock fell 14.5% and became the worst performer in the Dow Jones Industrial Average in 2021.
Despite the challenging circumstances, Disney could still emerge on top this year. Of the 17 analysts covering the company, 14 have a “Buy” rating on the stock. Earlier this month, Wells Fargo senior analyst Steven Cahall told CNBC that 2021 was a “rare but clear strategic misstep” for Disney. Cahall, who selected Disney as his 2022 Top Large Cap Pick, said Disney didn’t have the level of content that its peers in the streaming business did and that it showed in 2021.
With its increased spending on content in 2022, the company should fill that gap. “It’s not rocket science. You put out a lot of content and people sign up to watch it,” he said, adding that more content gives Disney “more shots on goal.” While operations at the company’s Parks division have been hampered due to new COVID variants, Cahall expects a rebound this year. He has a price target of $196 for Disney stock.
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