Tuesday’s drop in Disney shares is exaggerated, at the same time as the club holding company reports mixed results for the second quarter of fiscal 2024. We like what we see under the headlines, which could turn the selloff right into a buying opportunity once the dust settles on the stock. According to analyst estimates at LSEG, January-March revenue was roughly flat year-over-year at $22.08 billion, barely below expectations of $22.11 billion. Adjusted earnings per share rose 30% to $1.21 within the quarter, beating the LSEG consensus forecast of $1.10 per share. Disney Why We Own It: We value Disney for its world-class experiential amusement park business, which has demonstrated immense pricing power. We also consider within the upside that might be realized as management reduces costs and increases profit margins by streamlining its direct-to-consumer product offering, exploring additional ways to monetize the corporate’s premium content portfolio and finding latest opportunities , to monetize ESPN. Competitors: Comcast, Netflix, Warner Bros. Discovery, and Paramount Global Last Purchase: August 28, 2023 Start: September 21, 2021 Bottom Line: There were some puts and takes this quarter, but management stays heading in the right direction. A ten% stock decline after earnings normally indicates that the outcomes and guidance were a fiasco. This is a far cry from what we see at Disney. Disney’s cost-cutting efforts are progressing, pricing power appears robust, and its combined direct-to-consumer (DTC) streaming business is predicted to be profitable by the tip of its fiscal yr in September. In the second quarter, the combined company – Disney+, India’s Disney+ Hotstar, Hulu and ESPN+ – posted losses of $18 million, far larger than the $659 million loss within the year-ago period. To make sure, the DTC business will post steeper losses in the present quarter – and that is clearly weighing on the stock on Tuesday – but a recovery is predicted within the July-September period. All of that is leading management to lift its full-year earnings outlook. We were also pleased to see management repurchase $1 billion of shares in the course of the quarter, while reaffirming plans to repurchase a complete of $3 billion by the tip of fiscal 2024. There’s no denying that Tuesday’s stock drop is painful. But we’re able to have a look at the decline through a buyer’s lens, having made two sales at higher prices last month. The first sale – on April 1 at $121.72 per share – got here after Disney increased the weighting in our portfolio to five%, a level at which our savings discipline normally comes into play. We further reduced our stake to $114.25 per share on April 15, following management’s victory against Nelson Peltz. We usually are not taking immediate motion, but given the upward revision of the earnings forecast and the reaffirmation of the sustained profitability of the DTC business after the tip of the present quarter, we consider this decline is excessive. In some ways, the response to Disney’s quarter reflects how Netflix’s earnings report was received in April. The stock fell 9% in a single session, stalled for a number of weeks, and is now only about 1% lower than this report. We would not be surprised to see similar momentum at Disney as investors realize that Disney’s streaming platform might be a top player within the crowded field. In fact, chatting with CNBC on Tuesday, Disney CFO Hugh Johnston identified that while the corporate is not seeing any major slowdowns — its theme park business stays strong, for instance — its streaming division could potentially profit from tightening consumer budgets , as people expect Consolidate streaming subscriptions for the very best services. We are increasing our price goal from $120 to $130 attributable to an improving full-year earnings outlook and the expectation that we’re in the ultimate quarter of DTC losses. However, we maintain our 2 rating as we search for stocks to seek out support, recognizing that the near-term DTC earnings outlook will likely limit upside potential for now. Looking ahead, Disney’s combined DTC business remains to be heading in the right direction to succeed in profitability by the tip of fiscal 2024 in September – a goal the corporate set years ago. However, the present quarter is bleaker because the weakness is attributed to the streaming offering in India, often called Disney+ Hotstar, which is weighed down by seasonality within the country’s sports calendar. As far as we’re concerned, the more essential part is that management said it expects DTC profitability to rebound in the next quarter, with further improvement in fiscal 2025. Disney’s Experiences division – home to its theme parks, cruises and consumer products – is that this the case Profits are also expected to return under pressure in the present quarter. Among the explanations cited by management were timing issues equivalent to technology costs and the date of Easter, in addition to higher wages and a few normalization of post-Covid demand. Still, the segment’s year-over-year profitability is predicted to “recover significantly” within the fourth quarter, management said, helping to allay concerns in regards to the current period. The team also continues to expect cost savings to exceed $7.5 billion on an annualized basis by the tip of the fiscal yr and to generate free money flow of over $8 billion in fiscal 2024. On a more positive note, management is now targeting full-year earnings growth of 25% year-over-year, up from 20% previously. Taking under consideration earnings of $3.76 per share in 2023, Disney’s updated forecast implies earnings of about $4.70 per share, a penny below Wall Street’s expectations. Quarterly Commentary Entertainment Results within the entertainment segment were mixed. The good outweighs the bad, nevertheless, because the direct-to-consumer portion of the segment — the important focus for investors — posted better-than-expected sales and a surprise profit at Disney+ and Hulu. DTC profitability benefited from core Disney+ subscriber growth, higher retail subscription prices, higher promoting revenue attributable to higher impressions and lower distribution costs. Disney+ Core subscribers – excluding Disney+ Hotstar in India – increased by over 6 million, with average core revenue per user (ARPU) increasing 44 cents sequentially, as a 15 cent decline domestically was greater than offset by a 75 cent increase internationally was balanced. Hulu Live TV benefited from higher prices and subscriber growth. DTC is predicted to report a loss in the present quarter without achieving core customer growth. However, the corporate is predicted to return to profitability within the fourth quarter and the variety of subscribers will increase. In the conference call, management cited several profit levers it must work with to ultimately achieve its DTC profitability goals, including increasing engagement through bundling, expanding its programming catalog to incorporate some ESPN-related content, combating password sharing, and reducing the distribution costs. The profitability of Domestic and International Linear Networks – essentially the standard cable television business – was impacted by lower affiliate revenue attributable to subscriber declines. Domestic profitability was also driven by a decline in promoting revenue attributable to lower impressions attributable to lower viewership. Sports ESPN+ experienced a 2% sequential decline in paid subscriptions, but this was partially offset by a 3% increase in average monthly revenue per subscriber. The sports streaming service has yet to show a profit. Domestically, ESPN’s profitability was impacted by higher College Football Playoff costs attributable to airing an extra game in comparison with the identical period last yr and lower affiliate revenue attributable to declining subscribers. ESPN domestic promoting revenue was supported by higher rates benefiting from this extra CFP game and an extra National Football League playoff game in comparison with the identical period last yr. One encouraging highlight: ESPN had a powerful begin to the present quarter. Total daytime viewers reached their highest April level since April 2012 and primetime viewership reached a brand new April monthly record. Clearly, Disney still has an enormous opportunity in sports as the corporate implements its DTC streaming strategy for ESPN. Experiences Despite higher-than-expected revenue of $8.39 billion, the segment’s operating income fell in need of estimates. This discrepancy suggests margin pressure within the theme park, cruise and consumer goods businesses. Domestically, profitability benefited from strength at Walt Disney World Resort in Florida and Disney Cruise Line, although this was partially offset by lower results at Disneyland Resort in California. All three benefited from higher ticket prices, although these were partially offset by increased costs equivalent to wages. Internationally, operating results were driven by strength at Hong Kong Disneyland Resort because of higher ticket prices and increased food, beverage and merchandise spending. Attendance and room occupancy rates also increased in the course of the reporting period. (Jim Cramer’s Charitable Trust is long DIS. A full list of stocks might be found here.) As a subscriber to CNBC Investing Club with Jim Cramer, you’ll 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 foundation’s portfolio. If Jim discussed a stock on CNBC television, he waits 72 hours after the trade alert is issued before executing the trade. THE INVESTING CLUB INFORMATION SET FORTH ABOVE IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. THERE ARE NO fiduciary duty or duty IN RECEIVING YOUR INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. 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The atmosphere at Disney Bundle celebrating National Streaming Day at The Row in Los Angeles on May 19, 2022.
Presley Ann | Getty Images Entertainment | Getty Images
The retreat Disney Stock Tuesday is excessive, although the club holding company reports mixed results for the second quarter of fiscal 2024. We like what we see under the headlines, which could turn the selloff right into a buying opportunity once the dust settles on the stock.
