Can Walt Disney (DIS) stock ever regain its magic? That is a question investors have asked for the past twelve months. While the company has enjoyed success with its streaming platform Disney+, the shares have been a disappointment, down 16% over the past year, trailing the 16% rise in the S&P 500 index.
The media and entertainment conglomerate is set to report fourth quarter fiscal 2023 earnings results after Wednesday’s closing bell. The stock’s punishment could be an opportunity for investors who have waited on the sidelines and still believe in the Disney magic. Trading at ten-year lows and at just 17 times forward EPS estimates, the stock is relatively cheap. But to be sure, while there may be a temptation to load up on shares, they are cheap for a reason.
Disney, a stalwart of the entertainment industry, has struggled despite having a strong competitive edge. The company grapples with a set of challenges that has weighed on its fundamentals, including persistently weak profit margins, operating losses stemming from the Direct-to-Consumer segment, a mountain of debt. And there hasn’t been any sign suggesting that Bob Iger’s return as CEO of the company was a great decision.
The company recently announced plans to acquire Comcast’s (CMCSA) 33% stake in streaming service Hulu. Disney said it expects to pay about $8.61 billion, while analysts have valued the 33% stake held by Comcast at between $9 billion and $13 billion. It remains to be seen what the eventual purchase price is. But assuming Disney can realize the benefits and leverage of combining the platforms, Disney stock may finally begin to rise in the next 12 to 18 months.
For the three months that ended September, Wall Street expects the Burbank, Calif.-based company to earn 68 cents per share on revenue of $20.13 billion. This compares to the year-ago quarter when earnings came to 30 cents per share on revenue of $20.15 billion. For the full year, earnings are projected to decline 3% year over year to $3.47 per share, while full year revenue of $83.94 billion would rise 0.20% year over year.
Profitability and the the effects of the company’s 2023 cost-cutting initiatives have been a key focus, including the company’s efforts to save $5.5 billion in costs. Of that total, the company said $2.5 billion will come from non-content costs, including reducing its headcount by 7,000 workers. In many respects, these moves have begun to work. In the third quarter, the DTC segment reported a loss of $512 million which is about half the year-ago figure, while Q3 revenue rose by 9% to $5.5 billion.
However, it was a mix of good news and bad news. Paid subscribers across its streaming services fell by 5% sequentially to 219.6 million. In an effort to boost revenue per paid subscriber, the company implemented another price increase to keep up with Netflix (NFLX), which has raised prices successfully over several years. Meanwhile, the market continues to worry about the fate of linear TV advertising as Disney’s cable and television networks such as ESPN and ABC continues to struggle.
In Q3, the cable and television networks suffered a 7% revenue decline, while operating profit fell by 23%. And that’s where the company’s decision to unite with Hulu makes sense. Combining Hulu with Disney+ will present Disney with tons of advantages — not only can Disney realize stronger leverage with advertisers, uniting the platforms can drive down churn, boost new licensing deals as well as and cost savings opportunities.
These integration benefits can potentially have a strong effect on the company’s bottom line. On Wednesday investors will want additional details about the company’s long-term growth strategy as well as any insight into the company’s efforts to sell off TV and cable assets.
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