Disney stock rises as CEO Bob Iger unveils transformation plan

Disney earnings beat expectations

Disney reported an 8% year-on-year rise in revenue in the first quarter of its financial year to $23.5 billion, coming in just ahead of the $23.4 billion forecast. Adjusted EPS came in at $0.99, which was down 7% from last year but much better than the $0.75 pencilled-in by analysts.

The division that looks after its theme parks and resorts celebrated its best quarter since the start of the pandemic, with sales growing much faster than anticipated and a 25% jump in operating profit to $3.05 billion smashing the $2.6 billion expected by Wall Street.

Meanwhile, its media and entertainment arm reported a minor loss in the period as the profits produced by its TV channels were more than swallowed up by losses from its streaming services, content sales and licensing.

The good news is that losses from its streaming services have peaked and shrank to $1.05 billion in the quarter, a welcome result considering analysts were preparing for a wider loss of almost $1.2 billion.

The bad news is that Disney+ lost 2.4 million subscribers in the period, marking the first time it has shed users since being launched. This was not a surprise because Disney had warned that this would happen because of the lack of the Indian Premier League tournament on Hotstar – but the sharpness of the fall was considering markets thought it would lose a couple of hundred thousand subscribers. Plus, while ESPN+ and Hulu continued to grow, they both added fewer users than what markets had hoped for.

Disney CEO Bob Iger unveils ‘significant transformation’ plan

The centre of the attention yesterday was on Bob Iger, who made a surprise return as CEO late last year and was given a mandate from the board to help revive its prospects. Expectations were high considering Disney shares have soared higher since his return, and Iger did not disappoint with his plan.

‘After a solid first quarter, we are embarking on a significant transformation, one that will maximize the potential of our world-class creative teams and our unparalleled brands and franchises,’ Iger said. ‘We believe the work we are doing to reshape our company around creativity, while reducing expenses, will lead to sustained growth and profitability for our streaming business, better position us to weather future disruption and global economic challenges, and deliver value for our shareholders.’

Let’s have a look at Iger’s plan for the House of Mouse.

Disney restructures divisions

Disney is shaking-up its divisions and the way it reports its results going forward.

The division that currently homes its theme parks, resorts, cruise lines, consumer products, games and publishing will remain largely unchanged.

However, the content side of the business is being broken up into two new units, one that solely looks after ESPN and its international sports channels and another named Disney Entertainment that will be responsible for the rest of its media and content, including Disney+ and Hulu.

Disney said this will return more control to its creatives while improving accountability and efficiency.

The core goal for its theme parks, resorts and cruise lines is to improve the guest experience and invest in new attractions and experiences. For example, it recently opened the new Mickey & Minnie’s Runaway Railway and revamped Mickey’s Toontown at Disneyland. It is preparing to open new attractions based on TRON and Moana at Walt Disney World, a Frozen-themed world in Hong Kong and a new area based on Zootopia in Shanghai.

The company said it plans to make streaming profitable by rationalising the amount being spent on content, cutting other costs in the business, growing subscribers, and optimising prices while also driving its newer ad-supported tier. Disney is becoming more selective over the content it makes and doubling-down on its most popular franchises and brands, but is still highly committed considering it plans to spend over $30 billion on licensed content and sports rights this year.

Disney cuts 7,000 jobs to lower costs

The restructuring will contribute to Disney’s new cost-cutting plans, with the company hoping to shave-off $5.5 billion from its expenses each year.

Around $2.5 billion will come from reducing everyday costs for things like administration. Disney has said it expects half will come from a cut in marketing while 30% will be sourced through job cuts. Disney plans to layoff around 7,000 workers, which represents around 3.6% of its global workforce.

The other $3.0 billion worth of savings will come from cutting spending on content, although sports programming will not be impacted. This will take several years to feed through, so investors will have to be patient for these cuts to make an impact.

Notably, Disney is cutting costs but is still investing. It said its capital expenditure budget for this year will be around $6 billion as it improves its theme parks and resorts and pursues other capital projects. This will be up from the $4.9 billion spent in the last financial year and the $3.6 billion spent in the year before that.

Disney dividend to return in 2023

Disney was among a raft of companies that were forced to stop paying a dividend when the pandemic derailed its business, particularly the experience-based operations centred on theme parks and resorts. The payout is yet to return, but investors are hoping they won’t have to wait too much longer for them to be reinstated.

Disney said the dividend has been a big part of the returns offered to shareholders and that it is now aiming to ‘declare a modest dividend’ by the end of the calendar year. That is important as it suggests any payout could come not this financial year but early in the next one.

Who will replace Bob Iger as Disney CEO?

Iger, who is 71 years of age, has already made a big impact with his return and installed confidence that he can replicate the success delivered during his first stint at the company. However, he has only agreed to return for two years and, while this may be flexible, this suggests he should be leaving in November 2024.

With this in mind, Disney is not waiting to find his successor and has already established a succession planning committee that will consider both internal and external candidates. The four-member committee is made up of executive chairman Mark Parker, the chair and CEO of General Motors Mary Barra, president and CEO of Illumina Francis deSouza, and the boss of Lululemon Calvin McDonald.

Will Disney convince disgruntled investors?

Markets have welcomed the new plan outlined by Disney to make streaming profitable and improve the overall efficiency of the business considering the stock has jumped higher. That could be significant considering activist investor Nelson Peltz, who bought a sizeable stake in the House of Mouse last year, is now pushing for a board seat in the hope of driving change.

Disney has said it doesn’t need his help and claims Peltz does not understand the business. Still, shareholders will get a chance to vote on whether Peltz should join the board at Disney’s annual general meeting at the start of April. Trian, the company that Peltz owns his stake through, said it was ‘pleased Disney is listening’ after the update, suggesting the company has made headway in winning him over.

Where next for DIS stock?

Disney shares are up over 6% in extended hours trade this morning, putting the stock on course to open at its highest level in over five months at $118.60.

That has propelled the stock far above the $113 level of resistance that has limited the stock over the past week. It can now look to recapture the closing-peak seen in mid-August at $125. Trading volumes yesterday were over twice as high as its 10-day, 20-day and 30-day average to suggest the results have provided some momentum, and it looks like the 50-day moving average could cross above the 100-day average soon to provide another positive indicator.

Brokers remain bullish on the stock and see over 8% potential upside from current levels with an average target price of $128.86.

However, the RSI is on the cusp of re-entering overbought territory to suggest it could become more difficult to climb higher from here. Investors will hope that the $113 level of resistance can now turn to support if it comes under renewed pressure, although the November peak of $107.60 remains in play.

Take advantage of extended hours trading

Disney released earnings after US markets closed and most traders must wait until they reopen the following day before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.

With this in mind, you can take advantage of our service that allows you to trade Disney and other stocks using our extended hours offering.

While trading before and after hours creates opportunities for traders, it also creates risk, particularly due to the lower liquidity levels. Find out more about Extended Hours Trading.

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