Walt Disney’s turnaround takes shape

Shareholders in Walt Disney Co. (NYSE:DIS) had reason to feel better this year as a reorganization and restructuring plan seemed to point to brighter days ahead.

There’s no question things have improved.  Pandemic shocks are over, theme parks and cruise lines are booming and strategic investments look promising. The Disney+ streaming service though expensive, has turned a corner, and offers growth at a time when traditional TV viewing is eroding. A small $0.30 dividend yielding 0.31% has been reinstated and share buybacks have resumed.

Year-to-date the shares are modestly higher, up 7.6% at the current price of US $97.20.

During the pandemic there was huge optimism about Disney+ streaming which appealed to stay-at-home trends. That carried the shares to a peak of $197 in early 2021. They fell steadily thereafter hitting a 9-year low of $81 last August. Investors worried about rising losses at Disney+, fewer people going to the movies and the steady decline of cable TV where Disney’s premium channels are found.

Set against that are Disney’s assets. It owns theme parks, resorts and cruise ships. Its TV assets include ABC, FX and National Geographic. Its film studios are top notch: 20th Century Fox, Pixar, and Lucasfilm. Disney’s film library is a source of recurring cash.  

Here’s an update:

Earnings are up: The latest quarter was good. While ad revenue at traditional TV operations was lower, overall quarterly revenue was $22.08 billion, up 1%. Diluted earnings per shares of $1.21 were 30% higher.  It achieved cost savings of $500 million.

Proxy defeat:  The April annual meeting defeated a plan by activist shareholder Nelson Peltz to shake up the company’s board. That is allowing management to focus on their business. Peltz felt that Disney needed to move more quickly with a reorganization plan. He immediately sold $1 billion in Disney stock which sent the shares sharply lower.

Traditional TV is challenged: Viewers continue to abandon cable TV in favor of streaming services. US cable TV subscriptions peaked in 2012 at 100 million households. This has fallen to 60 million. Morningstar analyst Matthew Dolgin noted in a recent report that Disney’s top-tier networks, led by ESPN, ABC, and The Disney Channel were anchors of cable and Pay-TV services. As such they commanded premium rates.  

Pivoting to streaming:  Disney’s answer to the decline of cable has been Disney+ – which was launched in 2019.  It is also accelerating the ESPN sports network’s evolution as a streaming service. Mr. Dolgin believes that as Disney moves towards this model it has a big edge over the competition. Why? Because it has premium content and the highest likelihood among all competitors of maintaining a pipeline of the highest-quality programming. 

The problem has been that while viewers love Disney+, generating the content and supporting the infrastructure is expensive. Disney+ has lost about $12 billion since its 2019 launch. In the latest quarter it added 6.3 million subscribers bringing the total to 117.6 million. Better news was the service made a $47 million profit when it was expected to lose $100 million.

 ESPN streaming: ESPN, the hugely successful sports network is set to launch a streaming version of the cable TV channel ESPN sometime in the latter half of 2025.  ESPN’s fortunes grew with the cable TV, but growth has stalled with cable’s decline. Streaming opens new opportunities.

Theme Parks & Resorts:  Mr. Dolgin believes Disney’s theme parks, cruise lines and other vacation- related revenue streams, have the most durable advantage. The characters are timeless, and he believes it would be nearly impossible for competitors to offer destinations that are as attractive. They would have to buy cruise ships and build theme parks and also have the characters to drive interest at a national or global level.

 “In short, Disney can provide a type of experience that we expect will drive consistent demand, and its offering for that type of experience is unique and best in class,” he wrote.

One area where Disney is intensifying its effort is in Asia with an expansion to its theme park, resort and cruise line businesses.  

A new cruise ship with Singapore as  the hub will feed growth in the Asia-Pacific region.  The Disney Adventure launches in 2025 and will sail three- and four-night cruises.

The ship can carry 6,700 passengers, will have 2,500 crew and be the biggest of any Disney cruise ship. The ship and port investment are part of a 10-year plan to invest $60 billion to expand theme parks and cruise line business.

All of it adds up to the early stages of a turnaround. The company has more than 235 million subscribers across all its streaming services which surpasses Netflix. The pandemic damage has been done. Cruise line and theme park revenues are rising and financial controls are containing costs.

Disney’s is a powerful global brand in the Top 50 of the Fortune 500 list. In any market, language or currency, the family-friendly fare resonates. For investors that’s worth celebrating.

  This article appeared in the Internet Wealth Builder on July 8, 2024.  For information on how to reprint this article please view this page.