Disney shares fell on Wednesday as concerns about theme park attendance overshadowed streaming gains and better-than-expected headline results. However, the quarter met our key criteria, making the share price pullback a buying opportunity. Revenue within the fiscal third quarter was $23.16 billion, in response to LSEG estimates, beating the $23.07 billion expected by analysts. On an annualized basis, revenue rose 3.7%. Adjusted earnings per share (EPS) rose 35% yr over yr to $1.39, well above the $1.19 estimate, LSEG data showed. Disney Why we own this stock: We like Disney for its world-class theme park business, which has tremendous pricing power. We also consider there’s further upside as management cuts costs, expands profit margins through its direct-to-consumer (DTC) products, and finds latest ways to monetize ESPN. Competitors: Comcast, Netflix, Warner Bros Discovery, and Paramount Global Last Buy: July 29, 2024 Start Buying: September 21, 2021 Bottom Line Disney’s streaming results give us the arrogance to view Wednesday’s stock drop as a worthwhile buy. The combined streaming business — which incorporates Disney+, Hulu, and ESPN+ — posted its first quarterly profit barely ahead of schedule. And executives expect the corporate to make more cash in coming quarters to fulfill its previously stated goal of a double-digit operating margin. Subscription price increases announced Tuesday will help, as will the excellent crackdown on password sharing set to start next month. “Streaming was a black hole,” Jim Cramer said Wednesday. “All of a sudden, streaming has recovered. And that’s really what it comes down to. I think Disney is an absolute buy here,” he added, although club restrictions prohibit us from trading the stock for not less than the subsequent 72 hours as Jim discussed the corporate on CNBC TV Wednesday morning. A giant concern for sellers is Disney’s theme parks division, which missed revenue expectations for the quarter. This was attributable to slowing demand that management expects to proceed for a number of quarters. This led to stagnant revenue growth within the experience segment. It’s actually not ideal to see the corporate’s profit engine stall, but we’re not nervous for several reasons. CFO Hugh Johnston suggested on the corporate’s quarterly earnings call in May that demand for parks was normalizing after the post-pandemic boom, which investors understandably didn’t like on the time. Then about two weeks ago, CNBC parent company Comcast released weak results for its April-June Universal theme park business, which weighed on Disney stock this session. Now add to that the final concerns concerning the health of the U.S. economy and consumer spending, which have grown stronger in recent weeks. This gloomy backdrop for the parks division is one reason Disney ended Tuesday’s session at just below $90 per share. It could be a unique story if Disney were to report these results and a measured outlook for the parks business at a share price of, say, $110 per share. In that case, we would be coping with a more dangerous situation. Instead, we are able to view Wednesday’s decline opportunistically, on condition that shares are actually trading near their yearly lows — and we sold shares around yearly highs in April. We reiterate our Buy 1 rating on the stock. DIS YTD Berg Disney’s year-to-date stock performance. Outlook After delivering robust third-quarter earnings, Disney raised its full-year adjusted EPS growth goal to 30% from 25%. The company’s forecast free of charge money flow of $8 billion in fiscal 2024 stays unchanged, Johnston said on the conference call. The CFO also said Disney continues to look for methods to chop costs, which contributes to earnings growth. Disney has set a goal of not less than $7.5 billion in annual cost savings by the tip of fiscal 2024. “In large companies, I think there’s always an opportunity to do more with less,” said Johnston, who joined Disney as CFO in December 2023. He held the identical role for greater than a decade at PepsiCo. “So we’re going to continue to be as aggressive as we can to both improve the bottom line and reinvest in the business with all the great opportunities we have.” With the most important hurdle to combined streaming profits now cleared 1 / 4 ahead of schedule, Disney expects fourth-quarter profitability to enhance. Combined operating income was $47 million within the third quarter, in comparison with a lack of $512 million within the year-ago period. Currently, Wall Street is expecting DTC operating income of $86 million within the three months ending in September. While Johnston reiterated that Disney is “urgently” searching for to succeed in double-digit margins, he didn’t provide further details on the timeline. To some extent, we understand the reluctance to commit to a particular goal, besides, it could be nice so as to add a little bit more color. Perhaps a silver lining: Johnston said the long-term goal is to “significantly exceed” the double-digit mark. That could be more in keeping with the margins streaming pioneer Netflix has been in a position to achieve. Quarterly Commentary Disney’s entertainment business delivered a better-than-expected quarter, because of outperformance of revenue and operating profit in all three areas: Linear networks, including channels corresponding to ABC Network, FX, Freeform, and National Geographic. Direct-to-consumer, including Disney+, Hulu, and its streaming service in India called Disney+ Hotstar. Content sales and licensing, including theatrical distribution and licensing of content to third-party platforms, amongst others. Most essential, after all, is DTC, which reported 15% year-over-year revenue growth within the quarter. This is up barely from the 13.2% gain within the second quarter and in keeping with the expansion rate in the primary quarter. Results were boosted by a 20% increase in promoting revenue in comparison with the identical period last yr. Another positive sign: Total Disney+ subscribers within the U.S. and abroad rose to 118.3 million as of June 29, up from 117.6 million at the tip of March. Operating income on the entertainment-focused streaming services was barely negative, with a lack of $19 million, after being positive within the second quarter. But that is hardly a cause for concern. Management warned concerning the quarterly swing in May, attributing it to the price of the cricket streaming rights for Disney+ Hotstar. And at that time, the most important focus was on achieving profitability for the combined streaming business, which also adds ESPN+. One brilliant spot within the report that has nothing to do with streaming: Disney’s recent box office success, which contributed to the better-than-expected performance of the content sales and licensing unit. We had feared that Disney’s film business had lost its way, but the recognition of “Inside Out 2” and “Deadpool & Wolverine” proved otherwise. “Inside Out 2” only ran in theaters for a few weeks within the quarter under review, while “Deadpool & Wolverine” hit the massive screen in late July. While the box office contribution to financial numbers is vital, the success of those movies helps bolster all parts of the corporate with its “flywheel” of business units. For example, CEO Bob Iger mentioned on the conference call that the primary “Inside Out” saw a surge in viewership on Disney+ because of the sequel. Disney’s experiences segment — consisting of theme parks, cruises and consumer products corresponding to merchandise sales and mental property licenses — failed to realize revenue of $8.39 billion or operating income of $2.22 billion. The weaker demand that affected third-quarter performance is prone to proceed in the subsequent few periods. Johnston said the experiences segment’s revenue is predicted to be flat within the fourth quarter, while operating income will decline year-over-year. However, Johnston sought to allay concerns a couple of dramatic slowdown. “Obviously the U.S. consumer is a little weak,” Johnston said in a CNBC interview on Wednesday. “You’ve seen it in the reports of a whole range of consumer goods companies. But in reality, people are going to tend to hold on to their holidays quite strongly because they are an important part of the family unit.” “One of the things about this business – and it’s a great business because it has such great IP [intellectual property] — is that it was hit late and less severely compared to the other theme parks and recovered sooner,” he added. “So I think the theme park business is fundamentally in good shape. It’s just a little bit weaker than it was before.” (Jim Cramer’s Charitable Trust is long DIS. A full list of stocks could be found here.) 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People watch Walt Disney’s Carousel of Progress attraction at Magic Kingdom Park at Walt Disney World in Orlando, Florida on May 31, 2024.
Gary Hershorn | Corbis News |
Shares of Disney fell on Wednesday as concerns about theme park attendance overshadowed streaming gains and better-than-expected results. However, the quarter met our most significant criteria, so the share price decline presented a buying opportunity.
