On Feb. 7, Walt Disney Company (DIS) shares rose as much as 10.5% - their biggest intraday gain since December 2020 - after the media giant reported better-than-expected results for its fiscal first quarter. Adjusted earnings came in at $1.22 a share, which beat the 99-cent average of Wall Street estimates. And thanks to cost cutting, Disney said profits this year will rise by at least 20% to about $4.60 a share, again topping Wall Street estimates of $4.27.
The company said it had reduced expenses by $500 million in the first quarter, and also predicted it would meet or exceed its target of $7.5 billion in annualized savings this year. After years of underperformance, is DIS finally a buy?
Inside Disney's Winning Quarter
The big number for me was that the company’s overall losses in streaming (Hulu, ESPN+, etc.) shrank to $216 million from $1.05 billion a year ago. Losses were $300 million lower than the prior quarter, thanks to price rises and higher advertising revenue.
In addition, Disney said it expects to add as many as 6 million core Disney+ subscribers this period. Disney management continues to predict its streaming operation will reach profitability by the fourth quarter of the current fiscal year.
But the brightest star for Disney last quarter was its international parks, where profit rose more than fourfold and sales increased 35% from last year. Here in the U.S., there was only a modest 4% gain in revenue and a 2% drop in profit, with attendance falling at Walt Disney World in Florida. Overall operating income at its theme park business rose 8% to $3.1 billion.
At the same time, the company’s traditional media businesses continue falling into a black hole from one of its Star Wars movies. This business is being hurt by an accelerating decline in its broadcast and cable TV business — led by ABC — and continued losses at the division that includes the film studio. The once-highly successful movie division has registered quarterly losses for most of the past two years.
Revenue from content sales and licensing, including the film studio, fell 38% from a year earlier. Sales at Disney’s domestic TV networks slumped 14% during the quarter, impacted by strikes that shut down production in Hollywood.
Strategic Turnaround Moves by CEO Iger
That’s why Disney is moving away from its traditional media business and taking other steps to try and regain its "Magic Kingdom" form.
Part of the price spike Disney has enjoyed lately - up 19% year-to-date - is due to its $1.5 billion investment in Epic Games, the company behind the popular video game Fortnite. Disney and Epic Games will join forces to build a “Disney universe” over the next couple of years, which marks the company’s first major move into gaming.
CEO Bob Iger said, “You can imagine the creation of short-form videos, or we may even use the platform to distribute some of our content. There’ll be some opportunities to buy digital goods, maybe even at some point physical goods.”
And I would be remiss to not mention Taylor Swift, who is an economy all to herself. Disney will look to cash in on Taylor Swift mania, as its flagship streaming service gained the exclusive streaming rights to her Eras Tour movie starting on March 15. The Disney version will feature four additional songs that were not in the movie theater's release, which grossed more than $260 million.
Iger also said Disney will launch a new version of its ESPN streaming service in 2025. He said it will be a “very immersive” app that will feature integrated betting, enhanced statistics, fantasy sport leagues, and ecommerce features.
Perhaps most notably, Disney's ESPN, Fox and Warner Bros. Discovery (WBD) announced a joint venture to combine their sports programming non-exclusively on a new direct-to-consumer video streaming platform. Each company will own one-third of the joint venture, with the new platform set to include most major leagues and a large proportion of U.S. sports broadcasting rights, including the NFL, NBA, WNBA, MLB, NHL, NASCAR, college sports, UFC, PGA Tour Golf, Grand Slam Tennis, FIFA World Cup, and many others.
And yes, Disney streaming subscribers will be able to bundle the new service with its other streaming services.
Disney is also borrowing a strategy from Netflix (NFLX) by cracking down on password sharing for its streaming services. The company will begin contacting account holders suspected of improper sharing later this year, and offer them the chance to add other accounts for an additional fee. It does not expect to see results from the crackdown until the end of 2024.
Finally, thanks to pressure from activist shareholders like Nelson Peltz’s Trian Partners and Blackwells Capital, Disney unveiled shareholder-friendly measures. These include a $3 billion share buyback and a 50% dividend increase,
Why Disney Stock Is a Buy
Add it all up, and I believe the magic is back at Disney, with greater focus and execution on all businesses. DIS holds great value, with many valuable assets. I expect profit margins to expand and free cash flow to rise significantly, both as a result of the cost-cutting measures Disney initiated in 2022 as well as smarter spending on content. It should see its EBITDA margin rise from about 16% in fiscal 2023 to 23% by 2028, potentially returning to a level not seen since 2019.
No company can match the depth of Disney’s iconic characters, franchises, or content library, which will keep its streaming services in high demand. The allure of Disney’s theme parks business is unmatched, and should be a continuing profit engine.
Buy DIS under $110.
