🔨 Disney CEO Drops Thor’s Hammer

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Our proprietary Trackstar data highlighted a surge in Netflix (NFLX) searches this past month. But that’s unsurprising since the stock more than doubled off its lows, even though it’s still down almost 50% from its all-time highs.

What really caught our eye was the consistent search volume for Disney (DIS).

The company has been in the news a lot over the past year or so, and not always for good reasons.

But that may be about to change.

Streaming was all anyone could talk about last year. And it was a key focus for Disney.

Yet shares are down 24% over the last three years, vastly underperforming the market, a rarity for the House of Mouse. 

The board didn’t like this direction, and felt pressure from activist investors. So in November, it brought back legendary CEO Bob Iger, who ran the company from 2005 to 2020 and is responsible for acquiring Pixar, expanding the Marvel Cinematic Universe, launching Disney+, and growing Disney theme parks.  

In his first earnings release since coming back, Iger threw down Thor’s hammer, announcing 7,000 job cuts, a plan to cut spending by several billion dollars, and a plan to reinstate the company’s dividend. 

The shake-up has heavily intrigued financial pros. Disney is one of their 15 most popular searches over the last month, according to Trackstar. 

Can Iger help DIS regain its winning ways, or has there been too much damage for it to recover?

Disney’s Business

Since Walt Disney founded the company in 1923, it’s grown into a multinational mass media and entertainment enterprise. It operates through the following business segments: Disney Media and Entertainment Distribution and Disney Parks, Experiences and Products. 

Source: Disney

Media and Entertainment Distribution includes the ABC, Disney Channel, and ESPN media networks. Disney earns money from advertising, cable and satellite distribution fees, and content licensing. 

Direct-to-consumer – including streaming service Disney+ – and international sales are under that umbrella. The company also has a majority stake in the streaming service Hulu. 

Source: Disney

Additionally, Disney produces and distributes feature films, television shows, and original content for its streaming platforms. 

Source: Disney

The company added nearly 57 million subscribers across its streaming platforms in 2022, for a total of more than 235 million. In Q4, it added 12.1 million Disney+ subscribers. 

Parks and experiences took a massive hit when COVID closed the economy. But Disney’s theme parks now run at full capacity most of the time. 

And the recent spat with Governor Ron DeSantis of Florida regarding Disney World’s special governing district, the Reedy Creek Improvement District, appears to be nearing a resolution that effectively leaves Disney in the same place it was before.

Financials 

Source: Stock Analysis

Disney’s revenues have been strong, growing from $67.4 billion in 2021 to $82.7 billion in 2022. The company is looking to reinstate its dividend sometime this year. 

Disney’s profit margin improved from 2.96% in 2021 to 3.80% in 2022. But it’s not nearly as high as it was in 2018, 15.9%. 

Over the last three years, Disney has heavily invested in the streaming space. While its subscriber growth has been phenomenal, as we mentioned, that side of the business isn’t yet profitable. The company has planned to cut 7,000 jobs and $5.5 billion in expenses to help reach profitability in its direct-to-consumer business. It believes it will reach this goal by 2024. 

It hopes Iger will help the company recapture high profit and operating margins. 

DIS has $8.4 billion in total cash and $48.3 billion in total debt. It generates $5.2 billion in operating cash flow and is financially stable, with a current ratio (current assets divided by current liabilities; the higher the ratio, the better financial position a company is in) of 0.99x. 

Valuation

Source: Seeking Alpha

While there’s not an apples-to-apples competitor, we focused on entertainment companies for comparison.

DIS trades at a P/E GAAP (price-to-earnings generally accepted accounting principles) ratio of 59.4x. Its biggest rival is NFLX, which trades at a P/E GAAP ratio of 34.9x. (A higher P/E ratio shows investors are willing to pay more today because they expect more growth to come.) Other peers include Warner Bros. Discovery (WBD), which trades at a P/E GAAP ratio of NM (not meaningful), Spotify Technology (SPOT), trading at NM, and Paramount (PARAA), trading at 4.9x. 

Disney’s price-to-cash-flow ratio of 37.7x is notably lower than NFLX at 76.4x, SPOT at 491.2x, and PARAA, which has yet to turn a positive cash flow. WBD has the lowest price-to-cash-flow ratio of the group at 14.7x, but the company isn’t profitable yet on a GAAP basis. 

Disney is reinstating its dividend. NFLX, SPOT, and WBD don’t offer dividends, while PARAA pays an annual dividend of $0.96 per share. 

Profitability

Source: Seeking Alpha

Disney’s heavy investment in streaming over the last three years hurt its net income margin. But the company has added over 250 million users to its streaming platforms. Again, the company believes it can turn a profit there by 2024. 

DIS has a net income margin of 3.9%, compared to NFLX at 14.2%, WBD at -20.1%, SPOT at -3.8%, and PARAA at 10.5%. 

Its EBIT margin of 7.9% is notably lower than NFLX at 17.8% and PARAA at 9.3%, but significantly higher than WBD at -4.5% and SPOT at -5.5%. 

DIS generates $5.2 billion in cash from its operations, far more than its peers. NFLX generates $2.0 billion, WBD $2.3 billion, SPOT $49.2 million, and PARAA -$373.0 million. 

Growth

Source: Seeking Alpha

Disney’s theme park business has enjoyed a resurgence since the pandemic. 

The company’s overall revenue growth of 15.7% in 2022 surpassed that of NFLX at 6.5% and PARAA at 9.3%. SPOT and WBD, two significantly smaller companies, had revenue growth of 21.3% and 118.6%, respectively. 

Our Opinion 9/10

Investors have to be excited to see Bob Iger back at Disney. 

During his first earnings announcement, he clarified that there’d be a shake-up. This will include the job cuts, spending cuts, and dividend reinstatement we mentioned.  

DIS is on the right path to return to its old form. We like the stock at these levels and believe it will deliver strong returns to investors. It’s trading a bit higher now, but anything below $100 a share is a fantastic discount.

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