The decline in Disney shares on Tuesday is overdone even though the club reported mixed results for the second quarter of fiscal 2024. We like what we see under the headline numbers, which could make a selloff a buying opportunity once the dust settles around the stock. Revenue in January-March was roughly flat year over year at $22.08 billion, slightly below the $22.11 billion expected, according to analyst estimates compiled by LSEG. Adjusted earnings per share for the quarter jumped 30% to $1.21, beating LSEG's forecast of $1.10 per share. Disney Why we own it: We value Disney for its best-in-class experiential theme park business, which has proven to have tremendous pricing power. We also believe in the upside that can be achieved by executing management to reduce costs and expand profit margins by streamlining direct-to-consumer product offerings, exploring additional ways to monetize the company's best-in-class content portfolio and creating new products. Ways to Profit from ESPN Competitors: Comcast, Netflix, Warner Bros Discovery, Paramount Global Last Purchase: August 28, 2023 Start: September 21, 2021 The Bottom Line There was some buying and selling this quarter, but management stays on track. A stock falling 10% after earnings usually indicates that results and guidance have been a train wreck. This is far from what we see with Disney. Disney's cost-cutting efforts continue, pricing power appears resilient, and its bundled direct-to-consumer (DTC) streaming business is still expected to achieve profitability by the end of the fiscal year in September. In the second quarter, the combined businesses — Disney+, India's Disney+ Hotstar, Hulu and ESPN+ — saw losses of $18 million, much better than the $659 million loss in the same period last year. The DTC business is certainly set to see bigger losses in the current quarter — and that clearly weighed on the stock on Tuesday — but a rebound is expected in the July-September period. It all comes down to management raising full-year earnings forecasts. We're also pleased to see management stepping up and repurchasing $1 billion worth of stock this quarter, with reiterating plans to repurchase a total of $3 billion by the end of fiscal 2024. There's no denying that Tuesday's stock decline was painful. But we are in a position to view the decline through a buyer's lens because we made two sales in the past month at higher prices. The first sale — on April 1 at $121.72 apiece — came after Disney ballooned to 5% in our portfolio, the level at which our discipline typically begins to wane. We reduced our stake again on April 15 at $114.25 per share after management mandated a win-win fight against Nelson Peltz. We are not getting involved immediately, but this decline appears excessive given the upward revision to earnings guidance and the reaffirmation of sustainable profitability for the DTC business once we pass the current quarter. In some ways, the reaction to Disney's quarter mirrors how Netflix's earnings report was received in April. The stock fell 9% in one session, tread water for two weeks and is now only about 1% below where it was trending in this report. We wouldn't be surprised to see a similar dynamic experience with Disney as investors realize that Disney's streaming platform will be the number one player in the crowded field. In fact, speaking with CNBC on Tuesday, Hugh Johnston, Disney's chief financial officer, noted that while the company isn't seeing a significant decline in trade — its theme park business is still strong, for example — the streaming unit could benefit from Consumer budgets are tightening as people look to consolidate streaming subscriptions into top services. We raise our price target to $130 from $120 on the back of improving full-year earnings outlook and the expectation that we are in the final quarter of DTC losses. However, we maintain our rating of 2 as we look for the stock to find support, while acknowledging that DTC's near-term earnings outlook is likely trending higher at the moment. Looking ahead, Disney's combined DTC business remains on track to become profitable by the end of fiscal 2024 in September — a goal the company has set out to reach for years. However, the current quarter is darker due to weakness attributed to India's streaming offerings, known as Disney+ Hotstar, which is affected by seasonality in the country's sports calendar. As far as we're concerned, the most important part is that management said a rebound in DTC profitability is expected in the next quarter, with further improvement in fiscal 2025. Disney's Experiences division — home to theme parks, cruises and consumer products — is also expected Earnings will be under pressure in the current quarter. Among the reasons cited by management were timing issues, such as technology expenses and the Easter date, as well as higher wages and some post-Covid normalization of demand. However, management said year-on-year profitability in the segment is expected to rebound significantly in the fourth quarter, helping to allay concerns about the current period. The team also continues to expect cost capture to exceed $7.5 billion year-over-year by the end of the fiscal year and generate more than $8 billion of free cash flow in fiscal 2024. Even more positive, management is now targeting full-year earnings growth of 25%. % year on year, up from 20% previously. Given 2023 earnings of $3.76 per share, Disney's updated guidance calls for earnings of about $4.70 per share, a penny less than Wall Street forecasts. Quarterly Comments Entertainment results in the entertainment sector were mixed. However, the good outweighs the bad as the direct-to-consumer portion of the sector — a prime focus for investors — saw better-than-expected sales and surprising profits across Disney+ and Hulu. DTC profitability benefited from Disney+ core subscriber growth, higher retail subscription prices, increased advertising revenue on the back of higher impressions, and lower distribution costs. Disney+ core subscribers – which excludes Disney+ Hotstar in India – rose by over 6 million with core average revenue per user (ARPU) increasing 44 cents sequentially, with a 15 cent decline domestically offset by a 75 cent rise at the regional level. International. Hulu Live TV has benefited from price increases and subscriber growth. DTC is expected to report a loss in the current quarter, with no growth in core subscribers. However, it is expected to return to profitability and see an increase in subscribers in the fourth quarter. During the call, management called out several profit levers they need to work with to ultimately reach DTC's profitability goals, including increasing engagement through aggregation, enhancing the programming catalog with some ESPN-related content, cracking down on password sharing and reducing costs. distribution. The profitability of domestic and international linear networks—essentially the traditional cable TV business—was impacted by declining affiliate revenues due to declining subscriber numbers. Local profitability was also impacted by lower advertising revenues due to lower impressions due to lower viewership rates. Sports ESPN+ saw a 2% sequential decline in paid subscriptions, but that was partially offset by a 3% increase in average monthly revenue per subscriber. The sports streaming service has not yet reached profitability. Domestically, ESPN's profitability was impacted by higher College Football Playoff costs due to broadcasting an additional game compared to the same period last year and lower affiliate revenues associated with lower subscriber numbers. ESPN's local ad revenue was supported by higher rates, which benefited from an additional CFP game and an additional NFL playoff game compared to the same period last year. Encouraging nugget on the call: ESPN is off to a strong start in the current quarter, with total viewers per day reaching its highest April result since April 2012 and prime-time viewership reaching a new record for the month of April. It's clear that Disney still has a big opportunity in sports as it implements ESPN's DTC streaming strategy. Experiments Despite better-than-expected revenue of $8.39 billion, operating income in the segment was below estimates. This mismatch indicates margin pressure for the theme park, cruise line and consumer products businesses. Domestically, profitability benefited from strength at Walt Disney World Resort in Florida and Disney Cruise Line, although that was partially offset by lower results at Disneyland Resort in California. All three companies benefited from higher ticket prices, although this was partly offset by increased costs such as wages. Internationally, operating results were driven by strength from Hong Kong Disneyland Resort thanks to higher ticket prices and increased spending on food, beverages and merchandise. Attendance and room occupancy rates also increased during this period. (Jim Cramer's Charitable Trust is long DIS. See here for a full list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you'll receive a trade alert before Jim takes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charitable fund's portfolio. 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Ambience at the Disney Bundle celebrates National Broadcast Day at The Row in Los Angeles on May 19, 2022.
Presley Ann | Getty Images Entertainment | Getty Images
Back off in Disney Shares on Tuesday are overvalued even though the club reported mixed results for the second quarter of fiscal 2024. We like what we see under the headline numbers, which could make a selloff a buying opportunity once the dust settles around the stock.
