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Nathanson Downgrades Disney Stock to Neutral

The Walt Disney Co., one of the strongest of the media companies before the Coronavirus pandemic hit, has probably taken the biggest hits from the crisis.

Between shutting its theme parks, closing the movie theaters where its films are exhibited to cancelling the sports that make ESPN a powerhouse, Disney has been impacted in multiple ways as consumers habits change to avoid spreading the disease.

On Wall Street, Disney had many fans, including Michael Nathanson of MoffettNathanson Research, who had long recommended buying Disney stock. But on Monday, Nathanson downgraded Disney to “neutral’ from “buy.”

“We are downgrading Disney to Neutral, not because we have lost faith in those attributes, but rather because we believe there are a number of risks that could lead this unprecedented event to have a longer impact, with earnings revisions massively skewed to the downside,” Nathanson said.

In his report, Nathanson said said he has lowered his estimates for Earnings Before Interest and Taxes, earrings per share and cash flow to substantially below consensus, with the expectation that Disney's earnigns expectations will be getting revised downward til they catch up to “the grim reality.”

Nathanson notes that the present situation “creates significant and unrivaled earnings risk for the foreseeable future,” considering that parks and theatrical films have driving the company’s cash flow in recent quarters. On top of that, he notes, cord-cutting is accelerating, which hurts ESPN.

“On the brighter side, Hulu and Disney+ should be gaining strength from the crisis, but do not contribute free cash flow to offset the erosion elsewhere,” he said.

Nathanson adds that the decision to downgrade Disney is also “an admission that we believe the economic impact on the company will be longer than most anticipate, especially given the risks of a second wave of infections after reopening.”