Wall Street downgrades Club names Disney and Estee Lauder. Here’s our view

Wall Street firms issued bearish calls on Club holdings Walt Disney (DIS) and Estee Lauder (EL) late this week. Here’s a look at the headlines, along with our take, too. Walt Disney The news: Wolfe Research downgraded Club holding Disney Friday to peer perform, or neutral, from outperform, while removing its $133 price target on Disney shares. Wolfe does not keep price targets on stocks it rates peer perform. Analysts at the firm were discouraged by the “deteriorating” outlooks for Disney’s direct-to-consumer (DTC) subscriber base and linear TV growth following the entertainment giant’s mixed fiscal second-quarter results earlier this week. During the quarter, losses at Disney+, the company’s flagship streaming service, improved but it still lost subscribers for the second straight quarter. The analysts also noted that weakness in the advertising market may “continue into the back half of the fiscal year.” Still, the analysts predicted Disney can “deliver higher profits in the medium-to-long term and remain a premium content and brand factory.” DIS 1Y mountain Walt Disney (DIS) year-to-date stock performance. The Club’s take: Following Disney’s latest earnings print, we understand subscriber losses weighed on Disney stock, which has fallen almost 10% since Wednesday. However, we think Wolfe’s’ concerns are already priced into the current share price. During Disney’s fiscal second quarter, we were pleased to see the average revenue per user (ARPU) rise and DTC operating losses narrow. We are not ignoring the fact that Disney lost some subscribers in domestic markets. This is part of a natural tradeoff effect when any company pushes through price increases on its goods or services. Higher prices will lead to better levels of profitability over time, and that’s why we’re willing to let some softer subscriber data slide over the next few quarters. We were also encouraged by the robust performance at Disney’s parks business , which generated profitable growth for the quarter. We are staying patient with Disney’s turnaround under CEO Bob Iger and believe he can right the ship — including by cutting billions of dollars in costs and better monetizing content. Estee Lauder The news: Argus downgraded its rating on prestige beauty brand Estee Lauder Thursday to hold, from buy, following the company’s weak fiscal 2023 third-quarter earnings print on May 3. Analysts at Argus cited concerns over of the “slow pace of recovery in China and in the travel retail segment in Asia.” They now estimate fiscal year 2023 earnings-per-share (EPS) to come in at $3.80, down from a prior estimate of $6 a share. The analysts also reduced their fiscal 2024 EPS estimate to $6, from $7.20 a share. Estee Lauder management said last week that international flights in China and Korea were “subdued” and group tours were “slower to start.” Estee Lauder shares plunged 17% on earnings day and the stock has been in the market’s penalty box ever since. Argus said that if there’s a faster than expected rebound in China travel retail, it would consider upgrading the stock back to a buy. EL 1Y mountain Estee Lauder (EL) year-to-date stock performance. The Club’s take: Given that China’s economic recovery is still unfolding, we weren’t expecting an outperforming quarter from Estee Lauder. However, we were disappointed by the results. Following the weak quarter and the time it takes for inventory levels to normalize, Estee Lauder’s next report won’t be strong either. At the same time, management said it’s starting to see traffic recover in Hainan province, often referred to as the Hawaii of China. And with Estee Lauder’s business excluding travel retail in Asia growing 10% in the quarter, our conclusion is that the company is not facing a fundamental structural problem. It’s a temporary issue that will resolve as China’s economy continues to reopen after three years of strict Covid-19 regulations. We remain optimistic that broader consumer spending in China will reaccelerate to pre-pandemic levels. (Jim Cramer’s Charitable Trust is long DIS, EL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.