Disney’s newest earnings report and convention name after the market shut on Wednesday confirmed a mixture of progress below CEO Bob Iger, together with when it comes to cost-cutting and transferring in the direction of streaming profitability. It additionally confirmed challenges, resembling within the linear TV networks enterprise, in addition to new initiatives, together with plans to roll out a Disney+ advert tier overseas and crack down on streaming account sharing, that take pages from the Netflix playbook.
No shock then that Disney shares in early Thursday buying and selling had been little modified, up 1.1 % at $88.44, as Wall Road had a lot to digest in a single day. First reactions confirmed that analysts stay divided between bulls and people extra cautious till Disney solutions open questions or exhibits additional progress.
A number of Wall Road consultants lowered their inventory value targets following the earnings replace, whereas others touted their perception in an bettering outlook.
Financial institution of America analyst Jessica Reif Ehrlich stays a key Disney bull, reiterating her “purchase” score and $135 inventory value goal in a Thursday report below the title “Strategic transformation in movement,” by which she cited “new areas of optimism.” Amongst them are administration’s forecasts that it could save greater than the $5.5 billion in price cuts that it has focused and that Disney+ subscriber internet additions would speed up within the present fiscal fourth quarter.
“Whereas a number of strategic questions stay (e.g. way forward for linear, movie, and so forth.), we stay assured in Bob Iger’s potential to navigate the corporate by way of this transition interval,” Reif Ehrlich concluded. “Disney traditionally has traded at a 20 percent-plus premium to the S&P 500 (on value/earnings) versus the modest low cost it’s buying and selling at at this time (on calendar yr 2024 earnings estimates). Given the most recent steerage in addition to price slicing initiatives, we imagine consensus forecasts will seemingly be biased to the upside. Further progress towards reaching the corporate’s broader strategic targets might drive a number of growth again towards their historic premium ranges.”
Different Wall Road consultants centered extra on the near-term challenges for the Hollywood powerhouse.
MoffettNathanson analyst Michael Nathanson maintained his “outperform” inventory score on Disney, whereas slicing his value goal by $5 to $115 “to mirror our decrease estimates.” In a report entitled “As Promised, Bob,” he highlighted: “We don’t consider potential upside from any strategic structural asset adjustments.”
Amongst his estimate adjustments, the skilled lower his fiscal yr 2024 adjusted earnings per share estimate by 15 cents to $4.65 and his fiscal yr 2025 estimate by 30 cents to $5.80 a share.
Outlining the corporate’s present challenges, Nathanson defined: “The structural headwinds of Disney’s linear enterprise and the aggressive shift into streaming distribution, coupled with post-pandemic headwinds, has collapsed Disney’s income of their Media and Leisure Distribution enterprise (DMED). In fiscal yr 2018, the yr earlier than the acquisition of Fox and the launch of Disney+, DMED generated $9 billion in EBITDA. In fiscal yr 2023, we now estimate DMED profitability to be $2.4 billion. On the similar time, Disney’s Parks and Experiences Enterprise (DPEP) is producing a lot greater income in fiscal yr 2023 than it did in fiscal yr 2019.” The analyst forecasts $12.3 billion this yr, up from $9.6 billion in fiscal 2019.
Nathanson additionally highlighted the challenges analysts face with valuing Disney’s legacy movie and TV studios today. “Sadly, Disney’s disclosure and new enterprise construction make it not possible to benchmark this asset,” he stated. “In fiscal yr 2018, the yr earlier than Disney acquired Fox, Disney’s Filmed Leisure enterprise did $12.3 billion of revenues and $2.7 billion of EBITDA. Given the transfer to self-license and the collapse in each theatrical and residential video home windows, we surprise what profitability appears to be like like at this time.”
The MoffettNathanson additionally touched on the problem of doable asset gross sales or spin-offs that Iger has stated his crew was exploring. “Provided that Disney is within the technique of exploring all choices on the subject of its future mixture of belongings, we expect there’s a clear case to be made that below any situation Disney’s belongings are value materially greater than its present enterprise worth,” Nathanson concluded. “Maybe the simplest technique to shut that hole could be to create a brand new firm (or “newco”) with Disney’s Parks, Experiences and Merchandise phase mixed with Disney+ and the studio IP that fuels these flywheels. This asset would seemingly commerce at a premium valuation given the excessive moat, iconic belongings and powerful income development.”
The remainder he would put right into a separate “oldco, housing Disney’s linear networks, ESPN+, Hulu SVOD, Hulu Stay TV and Disney+ Hotstar. “Given peer [stock] multiples at Fox and Warner Bros. Discovery, we have now no illusions that the market will probably be beneficiant within the valuation of those companies,” Nathanson argued. “But, we expect that the low present implied worth of Disney’s non-park companies doesn’t require something heroic for these strikes to be accretive.”
Wells Fargo analyst Steven Cahall maintained his “chubby” score on Disney shares, however lowered his inventory value goal by $1 to $146 in a report entitled “Adaptation.”
“Whereas it’s hardly a simple street forward, we sense a brand new Disney outlined by adaptation, together with price cuts, value will increase, content material shake-ups, portfolio shaping, and so forth. Every little thing is on the desk, and this could possibly be the turning level,” he identified.
Among the many deliberate adjustments at Disney, he highlighted: “one other large value enhance on ad-free (home Disney+ to $13.99 monthly, Hulu $17.99 monthly, Duo $19.99 monthly), new worldwide Disney+ advert tiers, on-track to exceed $5.5 billion in price cuts, a password sharing crackdown forward, a sports activities betting alliance with Penn to get prime greenback, looking for ESPN DTC partnerships, and a willingness to transact non-core/non-ESPN linear nets (excluding content material homes).”
In streaming, together with bundles, Disney now has 77.5 million distinctive subscribers within the U.S. and Canada, Cahall wrote, mentioning that this was “on par with Netflix.” The analyst went additional with the Netflix comparisons. “We’re already bulls on DTC long run given Disney’s scale and margin potential pushed by price cuts and value ups,” he defined. “We predict new Disney+ pricing is extra in step with the Netflix common income per person (ARPU)/content material ratio of about $1 monthly for every $1 billion of content material worth.” Concluded Cahall: “We see the DTC earnings path as the most important potential worth unlock.”
The Wells Fargo skilled additionally took a glance forward, summarizing key investor questions and debates forward of a deliberate investor occasion in September. “It now looks as if rather a lot is on the desk and we’d count on the updates to deal with: 1) easy methods to enhance content material, which Bob Iger referenced on the earnings name and stays crucial; 2) outlook for streaming, together with when to see price enhancements drive DTC in the direction of break-even in fiscal yr 2024; 3) potential portfolio adjustments, resembling promoting linear excluding ESPN/ content material homes; and 4) key components forward of ESPN’s DTC transition.”
CFRA Analysis analyst Kenneth Leon reiterated his “purchase” score on Disney’s inventory after the earnings replace, however lower his value goal by $22 to $105. “We predict Disney holds nice worth, with distinct belongings which may be acknowledged utilizing strategic realignment and certain spin-offs,” he defined. However he lower his earnings estimates for fiscal years 2023 and 2024, which in flip drove his inventory value discount.
In distinction, Guggenheim analyst Michael Morris maintained his “purchase” score and $125 inventory value goal on Thursday. “Fiscal third-quarter income was largely in keeping with consensus expectations, with a parks beat largely offsetting media softness,” he summarized his key takeaways from the earnings replace. “Value self-discipline at DTC drove a phase working earnings beat.”
Based mostly on the earnings report and name, Morris lowered his fiscal fourth-quarter phase working earnings estimate from $3.3 billion to $2.8 billion and his fiscal fourth-quarter Disney+ core subscriber internet additions forecast from 3.5 million to three.0 million, together with 1 million home and a pair of million worldwide customers. The analyst additionally raised his fiscal yr 2024 DTC outlook, saying will probably be “benefiting from the value will increase.”
However Morris stays bullish, concluding: “Our $125 value goal displays our confidence within the long-term power and potential for parks development and the renewed deal with worthwhile development on the firm’s media and leisure belongings.”
In the meantime, Macquarie analyst Tim Nollen caught to his “impartial” score and $94 value goal on Disney, summarizing the most recent outcomes this manner in his report headline: “A lot occurring, however not a lot change to numbers.”
“New information included value will increase on Disney+ and new advert tier launches, however nothing concrete on big-picture plans for ESPN or different belongings,” the analyst highlighted earlier than explaining why he’s staying on the sidelines for now. “We imagine in long-term success of streaming companies, together with ESPN, in addition to the studio and parks franchises. However we see too many near-term points to help a extra constructive view.”
TD Cowen‘s Doug Creutz additionally stays much less bullish on Disney, reiterating his “market carry out” score with a $94 inventory value goal, however highlighting that his estimates and mannequin had been “below overview” following the earnings replace.
He referred to as the most recent outcomes “a combined bag” and expressed concern about “DTC costs going up whereas content material will get lowered.” Wrote Creutz: “We fear that buyers will reply poorly to the transfer given Disney’s simultaneous resolution to chop again on unique content material, exacerbated by the influence of the Hollywood strikes. Even when the extreme value/worth shift is accepted by customers, it’s nonetheless not clear if the speed of DTC profitability enchancment will greater than offset the speed of linear profitability attrition (seemingly over $2 billion year-over-year in fiscal yr 2023).”
Past Wall Road, Jamie Lumley, analyst at Third Bridge, additionally commented on Disney’s newest earnings report and convention name, initially specializing in ESPN. “The sports activities betting cope with Penn Leisure marks one other main change for ESPN and Disney as a complete,” he highlighted. “As cable audiences proceed to shrink, this could possibly be an initiative to drive development and broaden the income base as Disney appears to be like to discover strategic choices for this asset.”
He additionally talked about that consultants count on that ESPN might make a full pivot to streaming in 2024, arguing: “Nonetheless, Disney will seemingly wish to first resolve the way forward for Hulu earlier than it makes some other transformational adjustments.”
Disney’s streaming outlook was, in fact, additionally a key difficulty for Lumley. “Though the streaming enterprise continues on its march to profitability, there’s a lengthy street forward,” he wrote. “Our consultants count on that 2025 is a extra practical timeline to attain profitability than subsequent yr, particularly contemplating components like the twin strike in Hollywood and comparatively weak reception of Disney’s content material by audiences.”