The Wall Street Journal - 13.03.2020

B12| Friday, March 13, 2020 ** THE WALL STREET JOURNAL.

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FINANCIAL ANALYSIS & COMMENTARY

Magic Kingdom Faces Nightmare

Disney’s theme parks are its biggest business—and the one most at risk from pandemic

Slack

Comes Up

Short in

New Outlook

Shanghai Disney reopened its shopping and entertainment Disneytown zone this week, although the Disneyland amusement park remains closed.

HECTOR RETAMAL/AGENCE FRANCE-PRESSE/GETTY IMAGES

Warren Buffett once quipped

that it isn’t until the tide goes out

that you see who has been swim-

ming naked.

U.S. energy-industry executives

are surely praying that the ebb

tide is nearly over, and few as fer-

vently as Vicki Hollub, who runs

Occidental Petroleum.

Ms. Hollub doubled down last

year on the U.S. shale patch with

extraordinarily poor timing by out-

bidding much larger Chevron for

Anadarko Petroleum for $37 bil-

lion.

Chevrongot lucky by losing

out, proving once again that it is

better to be lucky than smart. Who

could have predicted a coronavirus

pandemic and a Saudi-Russian

price war?

But Ms. Hollub was decidedly

not smart. She was so desperate to

win that she boosted the cash por-

tion of her offer to avoid a share-

holder vote and left her company

exposed, forcing it to cut its divi-

dend for the first time in three de-

cades after she said it wouldn’t.

Mr. Buffett isn’t only a sage

voice in this story—he played an

instrumental role by giving Ms.

Hollub nearly enough rope to hang

herself.

His $10 billion in preferred

stock used to finance the deal,

worth almost as much as the en-

tire company, pays him $800 mil-

lion annually.

Ms. Hollub’s predicament is

reminiscent of another executive

who did a deal with Mr. Buffett af-

ter recklessly endangering a sto-

ried company. Andrew Liveris of

Dow Chemical.

In the summer of 2008, he got

into a bidding war for specialty-

chemical firm Rohm & Haas and fi-

nanced it in part by agreeing to

the sale of part of Dow to a Ku-

waiti state firm.

Once markets collapsed, it

pulled out. and Mr. Buffett’s Berk-

shire Hathaway put up $3 billion

in convertible preferred stock that

later gave him 6% of the company.

Dow cut its dividend on its com-

mon stock for the first time in

nearly a century to squeeze by.

Ms. Hollub may not be as fortu-

nate as Mr. Liveris, who retired re-

cently as the company’s longest-

serving CEO.

Financier Carl Icahn, who

blames Ms. Hollub for the debacle,

revealed to The Wall Street Jour-

nal on Wednesday that he has

raised his stake in the company to

10%.

Occidental should survive at

least, though possibly at the cost

of seeing Mr. Buffett convert some

of his preferred stock cheaply to

common equity. He always seems

to appear when American corpora-

tions get caught with their pants

down. — Spencer Jakab

OccidentalPetroleumshareprice

Source: FactSet

$70

0

10

20

30

40

50

60

2019 ’20

Magical thinking can’t insulate

the most magical place on Earth.

Disney investors now face a costly

and upsetting development.

Walt DisneyCo. on Thursday an-

nounced the closure of its Disneyland

Resort in California, Walt Disney

World Resort in Florida and Disney-

land Paris. The California closure will

begin on Saturday. Walt Disney

World in Orlando, Fla. and the com-

pany’s resort in Paris will both close

at the end of business on Sunday. All

three resorts will stay closed through

the end of the month. The company

had already shut its parks in China

and Japan last month in response to

the outbreak, though its Shanghai fa-

cility reopened this week at partial

capacity.

The moves come as large public

gatherings like conferences, con-

certs and sporting events are get-

ting canceled or postponed amid

the coronavirus pandemic. But it

was a tough step for Disney given

that theme parks are its largest

business segment, with its U.S. fa-

cilities also counting as major con-

tributors to the company’s bottom

line. Disney noted that it has had no

confirmed cases of Covid-19 at the

California park,but made the move

at the behest of state authorities

who are trying to curb large public

gatherings.

Investors have been anticipating

some bad news. Disney’s shares

have fallen 37% since the first of the

year. But the stock has still fared

better than many other travel-sensi-

tive sectors. Wall Street’s finest

have been slow to catch on as well.

Consensus estimates for the com-

pany’s Parks, Experiences and Con-

sumer Products segment for the

current fiscal year have come down

only 2% since the end of January,

according to FactSet. Disney man-

agement itself had seemed awfully

sanguine on the matter. The com-

pany even used its annual share-

holder meeting on Wednesday to

tout an Avenger-themed attraction

45-day world-wide closure of Dis-

ney’s parks.

The cost of that? About $2 bil-

lion to the park segment’s earnings

before interest, tax, depreciation

and amortization this year, Mr.

Juenger estimates. That is about

13% of his total Ebitda estimate for

the company this year.

Even if Disney keeps the Florida

resort open, a ban on European

travel and a sharp decline domesti-

cally could mean a drastic drop in

visitors. Its theme park outside Or-

lando is among the world’s top

tourist attractions and there is little

reason to think it will fare much

better than once-crowded, now-de-

serted, spots such as the Louvre or

St. Peter’s Square.

Disney investors should brace

themselves. For a company that de-

pends on drawing hundreds of mil-

lions of people into tight spaces ev-

ery year, business as usual during a

pandemic is unlikely.

— Dan Gallagher

The coronavirus pandemic may

be good forSlack Technologies,

but it isn’t in the numbers yet.

The workplace collaboration up-

start has benefited from the stay-

home trade. This reflects investors’

interest in companies whose busi-

nesses could get a boost from the

growing number of people working

from home to avoid the outbreak.

Zoom Video Communications

has led this pack. The videoconfer-

encing provider’s shares are up 61%

this year. Slack shares haven’t seen

nearly the same sort of uplift, but

the stock was positive for the year

and through much of the crash

Thursday, making it one of the best

performing U.S. stocks.

But Slack’s fiscal fourth-quarter

report late Thursday afternoon will

throw some cold water on that no-

tion.

Revenue for the quarter ended

Jan. 31 grew by 49% year over year

to $181.9 million. That beat Wall

Street’s forecast by about 4%.

However, the company’s projec-

tion for the current quarter and full

fiscal year came in below analysts’

estimates. The midpoint of Slack’s

projection for the fiscal year ending

next January calls for 35% revenue

growth. Zoom, which is similar in

size, projected 46% growth for the

same period in its results last week.

Slack’s shares slid 20% Thursday

following the results.

Like Zoom, Slack says it is still

too early to determine the net im-

pact the current pandemic is having

on the business. Masses of new

people working from home likely

means more usage of its service,

though Slack also faces plenty of

competition in this regard—mostly

from Microsoft’s Teams service.

But as Slack expands, it also be-

comes more dependent on large en-

terprise deals to fuel its growth.

Closing those types of deals is a

challenge when salespeople can’t

even fly to their clients.

Citigroup projected earlier this

week that software companies with

“high-touch sales models” will

likely see pressure in the current

environment. Slack officers said on

the company’s call Thursday that

“increased customer uncertainty

and travel disruption” is a risk to

its enterprise business. Even Slack

needs to press some actual flesh at

times. —Dan Gallagher

opening at its California Adventure

Park this summer.

Closing the U.S. resorts has the

potential to be costly. Domestic

parks accounted for about $17.4 bil-

lion in revenue last year—and 30%

of the company’s total operating

profit. John Hodulik of UBS esti-

mates the two-day closure of the

Disney World park in Florida fol-

lowing Hurricane Irma in 2017

amounted to a $100 million hit to

operating profit. In a report earlier

this week, Todd Juenger of Bern-

stein proposed a “base case” for in-

vestors to consider that included a

Theme parks comprise

Disney’s largest business

segment, with U.S.

facilities a big part.

Buffett and Occidental:

We’ve Seen This Movie

These Band-Aids Can Help Bear-Market Wounds

Investors nursing a damaged

portfolio should consider applying

a Band-Aid.

Volatility and sharp losses have

characterized the stock market for

several weeks as the novel corona-

virus spreads and energy prices

collapse. ButJohnson & Johnson

shares have hung in better than

most: The stock has shed 10% over

the past month, which tops the

S&P 500 by 5 percentage points.

No self-respecting portfolio

manager will trumpet that relative

outperformance, of course. And

buying a stock always entails some

risk, particularly when Mr. Market

smells a recession on the way. But

while few investors are looking to

add risky assets today, the health-

care giant’s business traits should

make it relatively safe to own in

the months ahead. J&J said in Jan-

uary that it expects sales growth

on the order of 5.5% this year be-

fore considering foreign-exchange

movements and acquisitions or di-

vestitures.

That forecast came before the

Western world began to under-

stand the danger of the coronavi-

rus and a possible recession. But

the company’s diverse product

lines—pharmaceuticals, medical de-

vices and consumer health care—

are all fairly well insulated against

even a severe economic downturn.

Recent history bears that out.

During the last recession, sales fell

by less than 4% in 2009 from a

year earlier, before returning to

growth in 2010. Like all stocks dur-

ing the financial crisis, J&J shares

fell sharply, but that decline was

far milder and briefer than for

most companies.

Granted, the virus itself could

result in some supply-chain issues:

J&J said on Feb. 28 that the situa-

tion was fluid. However, it didn’t

see pharmaceutical supply disrup-

tion or “significant” disruptions to

consumer-health supplies. As for

devices, the company said “the vast

majority” of global manufacturing

is running at or near normal capac-

ity at this time, including its plants

in China.

Meanwhile, the company still

sports a pristine balance sheet: It

ended 2019 with $8.4 billion in net

debt and generated nearly $20 bil-

lion in free cash flow. That gives

Chief Executive Alex Gorsky plenty

of flexibility that more leveraged

peers don’t have. Given ultralow in-

terest rates, J&J can buy back large

amounts of stock, boost its divi-

dend or acquire promising biotech

or device startups at discount

prices should the downturn persist.

The world’s largest health-care

company should be part of any

bear-market investing playbook.

—Charley Grant

In any bear market, there are a

handful of financial pundits who

cover themselves in glory and

many more who wish they could

delete the internet. And then

there’s Morningstar.

The firm, known for its

questionable mutual-fund

star ratings, also does equity

research. On Tuesday, two of

its analysts weighed in on

the market and economic im-

pact of the new coronavirus

pandemic which, according to

them, is really no big deal. They

wrote that the “10%-plus fall in

global equities since the outbreak

began is a gross overreaction.”

Morningstar is entitled to its

opinion, and its report is filled with

plenty of epidemiological detail.

But, in that vein, its “base case”

hardly sounds reassuring:

eight million fatalities world-

wide from coronavirus.

With global markets in

full-on panic mode Thurs-

day after fewer than 5,000

deaths, that would, putting

it mildly, not be taken well.

For anyone inclined to take

both its stock-market and

mortality forecasts at face

value, Morningstar has some

lovely five-star funds it would

like to show you.

CDC

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