Buy The Dip in Disney After Magical Profit Beat

Key Points

• Disney issued mixed results, and shares fell 5%, but this is a sell-the-news event for dip buyers. 
• Cash flow and FCF exceeded expectations and led the company to increase its profit guidance by 500 basis points. 
• Analysts are buying into this turnaround story and see the stock advancing 15% to 20% from the new lows. 

Walt Disney NYSE: DIS faces headwinds like any other business, but its brand strength and operational resilience shine through. CEO Bob Iger delivered another quarter of improvements and raised guidance for earnings, which suggests a sell-the-news/buy-the-dip event is in progress. Analysts' activity is part of the equation, with the group issuing a steady stream of price target updates since the last quarter driven by results and the turnaround story. They were expecting strength and forecast higher prices for the stock, suggesting a value opportunity is also in play for this discretionary stock. 

Disney Reports Mixed Results, Shares Fall 6% 

Disney had a solid quarter, with strengths in two segments offsetting weaknesses in the other. Among the issues for the market is that total revenue came in at $22.1 billion, up 1.3% from last year but shy of the consensus. However, the miss is slim at 22 basis points and offset by margin strength and guidance. 

Experiences were the strongest segmentally, with a gain of 10%, followed by a 2% increase in Sports. Experiences were underpinned by strength in International markets, which are expected to remain solid this year. Entertainment fell by 5% on mixed results. Linear revenues fell by 10%, Content & Licensing by 39%, offset by a 14% increase in DTC. DTC sales include a 17% increase in Disney+ subscribers and a $0.44 sequential increase in ARPU. ESPN was also solid, with 3% growth. 

The margin news is best. The company improved its operating margins on cost control and lower expenses, which included reduced eliminations of -14%, which is the cost of airing sporting and other linear programming on streaming channels. The net result is a 30% increase in adjusted earnings and earnings well above the consensus target posted by Marketbeat.com. Actual results beat the consensus by nearly 1,000 basis points and led management to raise guidance. 

Disney raised its adjusted profit guidance to about +25%, the 2nd increase since the end of last year, which is a substantial raise. The new target is up 500 basis points from last quarter and may be raised again later this year. 

Disney Capital Returns are on Pace for Increases

Disney’s capital return program is healthy and on track for increases over the next twelve months. The company reported $2.407 billion in free cash flow for the quarter, giving a dividend FCF payout/ratio of 22% for the quarter and 27% versus the full-year guidance. The dividend leaves ample room for share repurchases, which topped $1 billion for the quarter. 

Altogether, capital returns equaled 65% of FCF for the quarter and annualized to 77% of the FY guidance. This leaves room for increased capital returns this year (planned at 50% for the dividend), and the company is expected to increase its profits next year. Analysts are forecasting another year of high-double-digit earnings growth and may underestimate the company, given the earnings momentum in Q2 this year. Regarding the balance sheet, the company’s cash and assets are down but offset by decreases in debt that leave equity flat YOY. Share repurchases did not offset dilution in Q2, but this is only the 1st quarter since the resumption of buybacks; the share count should fall by the end of the year. 

Disney’s Stock Chart Technical Outlook is Mixed With Upside Bias

Disney’s share price fell more than 5% in premarket trading to test support at a critical level. If the market steps in to buy the dip, it will confirm support at the neckline of a Head & Shoulders chart pattern. In this scenario, the market will likely increase over the next few days or weeks to test resistance at $122.50. If the market moves above there, it could rally to the consensus target of $127 or higher. The bulk of recent revisions has the market for Disney in the $130 to $145 range, good for a gain of 20% from the post-release lows.