Analysts were reacting to the first-quarter earnings report from Walt Disney Co DIS, the first quarterly print since Bob Iger returned to lead the company as CEO.
The Disney Analysts: Loop Capital analyst Alan Gould had a Buy rating and raised the price target from $120 to $130.
RBC Capital Markets analyst Kutgun Maral had an Outperform rating and a price target of $130.
Needham analyst Laura Martin had a Hold rating and no price target.
Morgan Stanley analyst Benjamin Swinburne had an Overweight rating and a price target of $115.
Goldman Sachs analyst Brett Feldman had a Buy rating and raised the price target from $119 to $136.
Related Link: Bob Iger Returns As Disney CEO After Reports Of Growing Rift With Bob Chapek
The Analyst Takeaways: With CEO Iger returning to lead Disney, Loop Capital expected there to be an increased focus on cost savings and profitability. After the first quarter results, Gould said these efforts are “on steroids,” suggesting a more aggressive approach and quicker timeline.
“We anticipated $1.3 to $2.0 billion of cost-cutting; the company announced $5.5 billion-$3.0 billion of content and $2.5 billion of non-programming costs including 7,000 layoffs,” Gould said.
The analyst said when all the cost savings are fully factored in, it could bring an incremental $1.85 in earnings per share on top of estimates.
Gould also highlighted Disney eliminated guidance on Disney+ subscribers as it was “no longer chasing subs at all costs.”
The analyst saw a focus on cutting costs on content spending as conversative and noted programming costs were 88% of revenue for Disney+ in the quarter compared to 56% in the prior year and 45% for streaming rival Netflix Inc NFLX.
RBC Capital Markets' Maral saw a new chapter for Disney centered on “rationalizing its streaming business” with sustainable growth and profitability. The analyst called this plan “the bare necessities for a whole new world,” using well-known Disney songs.
“Key highlights include a strategic reorganization, a $5.5 billion cost savings plan, and a drastic evolution of the company’s DTC vision,” Maral said.
The analyst said there were some questions on the timing of the cost savings and when they would hit the company’s earnings per share.
“We walk away with much greater confidence in the margin profile for DTC and Linear Networks for FY25 and onward.”
Maral saw lower Disney+ subscribers in the future and cautioned there could be increased “risk to the story.” The lower subscriber estimates could be offset by higher revenue per subscriber and lower costs.
The analyst said ESPN being separated into a business segment for the company could be a storyline to watch.
“(Disney) noted that the ESPN brand remains very healthy and that the asset is a differentiator for the company, though interestingly expressed that it will be more selective about which rights it pursues moving forward.”
Management said it was not engaged in a spin-off or sale of the ESPN business. Instead, the company was looking for a pivot for ESPN away from linear television, which the analyst said doesn’t seem imminent.
Needham's Martin said Iger unwound many of the changes made at Disney by Bob Chapek, who previously replaced him as CEO of the company.
“Iger’s most important operational change gives content creators P&L responsibility again. We believe this maximizes ROIC on content budgets,” Martin said.
Martin said Chapek might have been fired after posting streaming losses of $1.5 billion in the last quarter.
While management said it didn’t plan on spinning off or selling ESPN, Martin noted Disney said the move was done to “add flexibility” and questioned if the company would consider selling 10% to 15% interest in the sports brand.
The analyst noted that while “Avatar: The Way of Water” has been a box office monster with $2.2 billion in global revenue, the results for Disney will be “muted” due to previous financing arrangements made by Fox Corp FOX. Disney would also share streaming rights on the film with HBO Max, a unit of Warner Bros. Discovery Inc WBD.
“Iger’s most intriguing idea (to us) was his observation that technology has shifted authority away from the producers and distributors of content to the consumer. We agree that it’s hard to make money if consumers can churn every month. Over time, we believe streaming companies will bundle (to lower churn).”
Morgan Stanley's Swinburne said the first quarter results gave him increased confidence in EPS growth of 20% annually through fiscal 2024.
“The hard work is ahead, but substantive and specific cost savings suggest a sense of urgency to maximizing long-term returns,” Swinburne said.
Swinburne saw three key points from the earnings report for Disney. The first key point is a new organizational structure that puts financial responsibility in the hands of studio heads.
“This is a clear unwind of the reorganization Disney undertook in 2021.”
The second key point was the $5.5 billion in cost savings with questions of when they would be seen in the financials and flow to the earnings per share.
“The $3 billion in content cost savings, which is outside of the sports business at Disney, represents a meaningful percentage of the $20 billion annually Disney spends on non-sports content. However, content development and production is a long lead-time business.”
The third key point from Swinburne was the Parks & Experiences division, which the analyst said was “the business that pays the bills.”
“F2Q is the last favorable comp from an attendance point of view, so we do expect revenue growth to moderate in 2H23. However, our full year per capital spending assumptions now look conservative.”
The analyst noted margins of 35% for the US Parks business were the highest since at least 1998.
Goldman Sachs' Feldman highlighted the cost savings the company had outlined for the future.
The analyst called the company’s expectation of Disney+ achieving profitability in late fiscal 2024 a key takeaway from the earnings report.
“Management expects core Disney+ subs may grow only modestly in Q2 at a similar pace to the first quarter. However, the company expects this growth to improve towards the end of the fiscal year,” Feldman said.
Feldman also highlighted the company’s Parks segment with management commentary that suggested attendance remained strong in the second quarter.
“There is no sign of a slowdown with QTD park attendance at both Walt Disney World and Disneyland Resort pacing higher year-over-year.”
DIS Price Action: Disney shares are up 1.43% to $113.37 on Thursday morning at publication.
Read Next: Disney To Restore Dividend By End Of Year, No ESPN Spinoff In The Works: Iger
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