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A couple waits in line to enter Downtown Disney in Anaheim, California on July 9, the first day the outdoor shopping and dining complex has been open to the public since it closed in mid-March amid the COVID-19 pandemic.

ROBYN BECK/AFP/Getty Images

Walt Disney Co. reopened its Orlando-based Walt Disney World theme park on Saturday, ending the longest shutdown of the company’s highly profitable U.S. theme park division in its history.

Yet investors remain wary that a reopening that includes attendance limits and strict physical-distancing rules will boost the company’s shares, especially as record numbers of coronavirus cases limit the appeal of travelling to Florida. Instead, they point to the company’s already-high valuation as a result of the outsized success of its Disney Plus streaming platform as limiting any benefit from the resumption of its U.S. park operations.

“Disney has become the ultimate hold. You don’t want to add to it here because it’s unclear how long it will be until park revenue comes back to a normalized level, but you don’t want to sell it” because it remains more attractive than other media companies, David Mazza, a managing director at Direxion, said.

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Disney did not respond to a request for comment.

Shares of the company are down 8.3 per cent over the past month, compared with a 2.3-per-cent gain in the S&P 500 over the same time, and have fallen 19.1 per cent since the beginning of January. Despite those declines, Disney trades at a trailing price-to-earnings ratio of 43.8, just below its 52-week high of 47.8. Its P/E fell to a 52-week low of 14 on March 23 after beginning the year near 22.

Much of the gains in valuation have come from renewed investor attention to Disney Plus, which has attracted more than 50 million subscribers since launching in November. That growth, however, will likely not make up for the hit from the decline in the parks division.

“The economic recession plus the need for social distancing, new health precautions, the lack of travel and crowd aversion are likely to make this business less profitable until there is a widely available vaccine,” analysts at UBS said. They project that earnings before interest and taxes in the parks division will fall by approximately US$500-million in this fiscal year and US$200-million the next, compared with a US$6.8-billion gain in fiscal 2019.

Bill Smead, chief investment officer at Smead Funds, said his firm has been reducing its position in Disney because the shares look overvalued at a time when its parks division will be limited and its ESPN and ABC segments are suffering from severe cutbacks in professional sports.

“A lot of the benefit you’d get from the return to full speed of parks and the return to full speed to professional sports is going to get ruined by a P/E contraction” once investor euphoria over the launch of its streaming business wears off, Mr. Smead said. “The next 10 years are spectacularly in their favour in terms of demographics, but the expansion of the earnings ratio at the same time that COVID is crushing a significant part of their business doesn’t make sense.”

Chris Marangi, a portfolio manager of Gabelli Funds, said investors are likely waiting for a larger margin of safety before taking bigger positions in the company, given its high valuation. Its parks division will likely not return to more normalized levels of revenue until at least 2022, he said, giving the company a short-term hit to earnings but building up longer-term demand once a vaccine relieves Disney of instituting capacity caps.

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Disney has reopened its Shanghai and Hong Kong Disneyland parks, and on June 24 announced it was delaying a reopening of the original Disneyland in Anaheim, Calif., indefinitely. The company’s Tokyo parks opened July 1.

“As we look out, Disney is the best-positioned media company for the next decade given their franchises and the success of Disney Plus in particular, but the near-term is going to be challenged,” Mr. Marangi said.

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