Interactive Investor

ii view: cost-conscious Disney cheers profit and subscriber growth

Shares in this iconic entertainments giant have fallen 28% over the last five years, underperforming a 31% gain for the Dow Jones index. We assess prospects.

9th November 2023 12:57

by Keith Bowman from interactive investor

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Disney 2 600

Fourth-quarter results to 30 September

  • Revenue up 5% to $21.24 billion
  • Adjusted earnings per share of $0.82 per share, up from $0.30 per share
  • Disney+ subscribers of 150.2 million, up nearly 7 million from three months ago

Chief executive Bob Iger said:

“As we look forward, there are four key building opportunities that will be central to our success: achieving significant and sustained profitability in our streaming business, building ESPN into the preeminent digital sports platform, improving the output and economics of our film studios, and turbocharging growth in our parks and experiences business.”

ii round-up:

Entertainment giant The Walt Disney Co (NYSE:DIS) detailed earnings which beat Wall Street forecasts as it increased targeted cost savings to $7.5 billion from a previous $5.5 billion.

Core Disney+ streaming subscribers climbed by almost 7 million from the prior quarter to 112.6 million. Add Disney+ Hotstar and it's 150.2 million, taking the total including Hulu customers to 198.7 million. Management reiterated hopes to make the business profitable by the end of 2024. 

Shares in the Dow Jones company gained by more than 3% in post results trading having come into this latest news little changed year-to-date. That’s in contrast to a 48% gain for streaming rival Netflix Inc (NASDAQ:NFLX) and compares to a near 3% gain for the Dow Jones index itself. Netflix recently reported streamers totalling 247 million. 

Total Disney revenues climbed 5% year-over-year to $21.24 billion, marginally missing analyst expectations, hindered by a 9% sales decline at its linear or traditional TV networks because of reduced political advertising. Earlier in the year, Disney hinted at a potential sale of the business. Adjusted earnings per share increased to $0.82 per share from $0.30 per share a year ago.

Sales and profits for its Experiences division led growth over the quarter, climbing 13% and 31% respectively year-over-year to $8.2 billion and $1.75 billion, as its parks business continued to recover from the pandemic. 

Profit for its Sports business improved 14% to $981 million, aided by rises in subscription payments for its sports focused ESPN channels. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results, highlighting management’s ongoing focus on rebuilding profitability. 

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. The Entertainment division including film production and traditional and streaming TV channels generates its biggest slug of sales at just under a half, followed by Experiences at just over a third and Sports the balance of around a fifth. 

For investors, pressured ad sales and falling revenues at its traditional TV networks are not to be ignored. Reigniting creative flare is arguably yet to happen given several disappointing box office film releases year-to-date. Intense competition across the streaming industry including from both Amazon (NASDAQ:AMZN)'s Prime service and Apple Inc (NASDAQ:AAPL) are not to be overlooked, while a return to the previous head Bob Iger still leaves questions and uncertainty over likely future leadership.  

On the upside, Disney's diversity of operations regularly sees positives for one division countering challenges for another. Success in cutting costs could help it reinstate the dividend going forward having halted the payout at the start of the pandemic. Ongoing exposure to sports content remains invaluable given its ability to generate large audiences, while hopes regarding a sale of its traditional TV networks and excluding sport, now persist. 

On balance, and despite continued risks, key areas of the business are moving in the right direction and a consensus analyst estimate of fair value at over $100 per share implies grounds for cautious optimism. 

Positives: 

  • Geographical diversity, strong brands, and media content bank
  • Reducing costs

Negatives:

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

The average rating of stock market analysts:

Buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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