Disney (DIS) Falls on Guggenheim Downgrade

Shares for The Walt Disney Company (DIS) fell by almost 3% after analysts at investment firm Guggenheim Partners downgraded the stock over concerns for the company's future profit growth. Disney, which reports earnings on Feb. 9, closed trading at $155.44 on Jan. 13. As of this writing, the stock is changing hands for $151.13. 

Key Takeaways

  • Disney stock is falling because it was downgraded to Neutral from Buy by investment firm Guggenheim Partners.
  • The firm cited the threat of new COVID variants disrupting operations and the entertainment behemoth's increased content spend as reasons for its downgrade.
  • Out of 17 analysts covering Disney, 14 have still rated it a Buy for 2022.

Why Did Guggenheim Downgrade Disney? 

Analysts at Guggenheim downgraded Disney stock to Neutral from their earlier Buy rating. They also cut the firm's price target on 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 in its Parks division.

Guggenheim also cited increased content spending by the entertainment behemoth as a reason for its downgrade. In an earlier filing, Disney had said that it plans to increase content spending by $8 billion, to $33 billion, in 2022. 

Guggenheim stated that the current trading price for Disney, roughly 17 times its expected 2023 earnings, values the company close to its fair estimate. "While we believe the worst of the overall bear-case narrative is understood (digital growth challenges, parks trend volatility and cost inflation), we still see shares as close to fairly valued," Michael Morris, Guggenheim analyst, wrote in the note.

Is Disney Still a Buy? 

After crashing to a low of $96.60 during the pandemic's onset, Disney registered 18% growth in its stock price in 2020. The next year was challenging, however. Subscriber growth at Disney Plus, which had powered almost all its gains during the pandemic shutdown, slowed. New COVID variants interfered with the company's plans to fully reopen other spigots of business revenue, including its theme parks and theaters. As a result, the stock fell by 14.5% and became the Dow Jones Industrial Average's worst performer 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 has selected Disney as his Top Large Cap Pick of 2022, said that Disney did not have the level of content that its peers in the streaming business did and that it showed in 2021.

With its increased content spend in 2022, the company should make up for that gap. "It's not rocket science. You put a lot of content out there and people will 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 were hamstrung due to new COVID variants, Cahall is expecting a rebound this year. He has a price target of $196 for Disney stock.

Article Sources
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  1. CNBC. "Guggenheim Downgrades Disney."

  2. The Hollywood Reporter. "Disney Plans to Increase Content Spending to $33 Billion in 2022."

  3. Investors.com. "Five of the Dow's Worst Performers in 2021." Accessed Jan. 14, 2022.

  4. CNBC. "Last Year, Disney Did Not Have the Level of Content Its Peers Did, and They Know It, Says Wells Fargo Analyst."

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