ii view: axe-wielding Disney to slash costs by $5.5 billion

In the middle of a streaming war but with its Parks business bouncing back, shares for this media mammoth are down over the last year. Buy, sell, or hold?

First-quarter results to 31 December

• Revenue up 8% to $23.5 billion
• Adjusted earnings per share down 7% to $0.99 per share
• Disney plus subscribers of 161.8 million, down from 164.2 million 3 months ago

Chief executive Bob Iger said:

“After a solid first quarter, we are embarking on a significant transformation, one that will maximise the potential of our world-class creative teams and our unparalleled brands and franchises. We believe the work we are doing to reshape our company around creativity, while reducing expenses, will lead to sustained growth and profitability for our streaming business, better position us to weather future disruption and global economic challenges, and deliver value for our shareholders.”

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ii round-up:

Now under former boss Bob Iger again, entertainment giant The Walt Disney Co (NYSE:DIS) detailed $5.5 billion of planned cost cuts including 7,000 job losses and a reorganisation of divisional structure. 

First-quarter sales and earnings both beat Wall Street expectations, with subscriber losses for its Disney Plus streaming service coming in less than feared following a previous hike in subscription prices. 

Disney shares rose by around 5% in after-hours US trading having come into this latest announcement down by around a quarter over the last year. That’s similar to Sky owner Comcast Corp Class A (NASDAQ:CMCSA) and UK entrainment company ITV (LSE:ITV). Prime Video owner Amazon (NASDAQ:AMZN) are down by more than a third over that time while shares for Netflix Inc (NASDAQ:NFLX) have recovered from a low of below $170 per share to a fall of around 11%.

Disney will now rejig its divisional structure into Parks and Experiences, Entertainment, which includes most of its streaming operations, and a separated-out ESPN business encasing its TV network interests. The move follows speculation regarding a hoped-for spinning out of the business, plans which Disney denied. 

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Earnings of $0.99 per share, down 7% year-over-year, beat analyst forecasts nearer to $0.80 per share. Sales for its existing Parks, Experiences and Products division, rose by a fifth to $8.7 billion, helping to push overall quarterly revenues up 8% to $23.5 billion. 

Disney Plus subscribers fell 2.4 million to 161.8 million, better than Wall Street forecasts for a fall of 3 million. 

Given its planned cost cuts, management highlighted hopes to reinstate the dividend before the end of the current financial year having halted it at the start of the pandemic. 

Broker Morgan Stanley flagged its increased confidence in the outlook following the changes, reiterating its ‘overweight’ stance on the shares.  

ii view:

Started in October 1923 by brothers Walt and Roy, Disney today offers investors a one-stop entertainment business. Its many brands include Pixar, Marvell Studios, Lucasfilm, 20th Century Studios, ABC News, National Geographic and Hulu. Its ESPN tv networks, originally standing for Entertainment and Sports Programming Network, still includes both traditional and sports channels. 

For investors, the intense competition across the streaming industry, including stock market titan Apple Inc (NASDAQ:AAPL), is not to be ignored. Business costs generally remain elevated, a cost-of-living crisis may see consumers cutting non-essential services like streaming, while the return to the previous head Bob Iger still leaves questions and uncertainty over the likely future leader.  

More favourably, plans to cut costs and return power to its creative staff have been well received. Diversity in its businesses allows one division to counter another, such as the boom in streaming during the pandemic against closed theme parks, while its exposure to sports content remains invaluable in its ability to generate large audiences. 

In all, and given its vast experience in navigating the ups and downs of the media industry, this media titan looks to remain worthy of long-term investor support. 

Positives: 

• Diversity of businesses, strong brands, and media content bank
• Cost cutting

Negatives:

• Inflation pressured consumers may cut entertainment spending
• Dividend payment suspended

The average rating of stock market analysts:

Buy