Disney: The Magic Is Coming Back

Key Points

• Disney had a mixed quarter, but turnaround efforts are gaining traction. 
• Margins are widening due to improved costs and reduced spending. 
• The stock is at a bottom and could begin to rally soon. 

Nearly a year after CEO Bob Iger’s return to Disney’s NYSE: DIS throne, the magic returns to the Magic Kingdom. While hurdles remain, there are signs that traction is building and will sustain earnings power this year and next. The critical takeaway is that the company is progressing toward reinstating the dividend, which would provide a significant catalyst for share prices. 

The stock is down more than 50% from the lofty levels of 2021 but showing signs of a bottom. Based on the analysts' chatter, the company is at a turning point that should help lift the market soon.

Refocusing, streamlining, and efforts to improve efficiency are on track to produce sustained revenue growth over the next 4 years, with margins widening along the way. 

The trend in the analysts' sentiment is bearish and weighing on the price action, but the post-release chatter suggests a turning point is at hand.

No analysts altered their rating or price target, but several, including those from Bank of America, Wells Fargo, and Morgan Stanley, applauded the results. The takeaway is that solid execution has renewed and given new optimism for F2023 and beyond.

The fact that everything from asset sales to cost-cuts and content shake-ups is on the table is a plus for the turnaround effort; flexibility will allow Eiger to reinvigorate growth and return the media segment to profitability. 

Disney Has Mixed Quarter: Shares Rise 

Disney had a tough quarter with revenue of $22.33 billion, growing only 4% compared to last year. The growth is solid but $0.200 billion less than the Marketbeat.com consensus estimate due to weakness in the media segment.

Disney Media & Entertainment, the largest segment by far, shrank by 1%, while the parks and products segment grew by 13%. Within the media segment, mixed results heightened speculation of what Eiger may do with ESPN and other legacy networks as the market for media turns more toward digital. 

The margin news is good. The margin was mixed across segments and sub-segments, with the media end losing money and the parks profiting. The takeaway is that a GAAP loss was posted, and adjusted earnings fell YOY, but the adjusted figures are well above the consensus despite the top-line weakness.

The adjusted $1.03 beat by more than 600 basis points but, more importantly, cash from operations and FCF are up significantly, with FCF up more than 100%. The increase in FCF is due to an increase in cash flow amplified by a 5.5% reduction in spending. 

Sell-Side Interest Is Building 

The institutional interest in Walt Disney is building and making a noteworthy leap in 2023. Institutional buying topped $45 billion for the quarter, more than 27% of the market cap, with shares trading near long-term lows.

This is a sign of confidence in Iger’s return and a trend that, if continued, will help lift the share price over the next few years. The increase in buying activity is consistent with a spike in volume and a critical support level that is likely to produce a bottom. 

The chart favors higher prices and a sharp rally in the near term. The market for DIS is oversold and overextended at current levels and ripe for a rebound. The rebound could gain significant momentum if the analysts start upping their targets. If not, the first target for resistance is near $90.50 and $94.

A move above $94 would signal a shift in the market and attract short-term traders that could drive it up above $100 and possibly to $110 by the end of the year. Assuming the Q4 results are equally impressive, a more substantial reversal could occur by the end of the year.