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Walt Disney Company (DIS) is scheduled to release its fiscal Q3 earnings after the close this Wednesday, Aug. 9. The stock’s price action has disappointed this year, and DIS is trading flat for the period - despite the S&P 500 ($SPX) rising in double digits.
Looking longer term, Disney’s underperformance is not limited to 2023. In fact, its current price levels are not too far above its March 2020 lows – which investors will recall as the time period when stock markets globally crashed in response to the emerging COVID-19 pandemic.
Last November, Disney even replaced its then-CEO Bob Chapek with his predecessor, Bob Iger – who has since taken multiple measures to turn around the entertainment giant. However, while DIS rallied on the initial news of Iger’s appointment, they have since fallen. The upcoming fiscal Q3 earnings call will be the third report under Iger's leadership, and markets will be looking for more details on the business turnaround.
Analysts Expect Disney’s Profits to Fall in Q3
Analysts expect Disney’s revenues to rise 4.8% YoY in fiscal Q3 and reach $22.5 billion. However, the company’s EPS is expected to fall 9.2% over the period.
If Amazon’s (AMZN) Q2 earnings were mostly about the “A” word (the company's enterprise-focused Amazon Web Services, or AWS), I believe it's the “S” word - or streaming - that might be in focus when Disney reports this week.
In 2019, the company pivoted to streaming with its Disney+ platform, and in the first 16 months after launch, it surpassed 100 million users. After accounting for Hulu and ESPN+, Disney now has more streaming subscribers than Netflix (NFLX) .
However, the relentless focus on streaming subscriber growth took a toll on Disney’s profitability, and the segment’s losses peaked at $1.47 billion in the fiscal fourth quarter of 2022 (ended in September). Iger has been trying to cut down the segment's losses, which shrank to $659 million in fiscal Q2 - even as the company lost 4 million streaming subscribers in the quarter.
What to Expect from Disney’s Q3 Earnings
In Disney’s upcoming earnings release, markets will focus on both streaming subscriber numbers as well as the segment’s profitability – especially after rival Netflix added 5.9 million subscribers in the June quarter, thanks to its password-sharing crackdown and ad-supported tier.
Along with the streaming business, investors will look for more insights into Iger's ongoing business transformation and cost-cutting efforts. Previously, Iger hinted he’s not averse to tough decisions on this front, including the disposal of linear TV assets that “may not be core to Disney.”
Wall Street Analysts are Bullish on DIS Stock
Ahead of its quarterly results, Wall Street analysts are bullish on Disney stock, and most rate it a Strong Buy.
Of the 23 analysts that cover DIS, 15 rate it a Strong Buy, and 2 a Moderate Buy. Five more analysts rate it a Hold, while only 1 rates it a Strong Sell. Disney’s mean target price of $117 is about 35% above the stock's current level, while the Street-high target price of $150 represents a premium of over 73%.
Ahead of this week's earnings release, UBS reiterated Disney as a Buy with a $122 price target, even as the brokerage said it's cautious heading into the report.
Why DIS Looks Like a Buy Ahead of Earnings
Disney is among the most iconic of global brands, and is the proverbial “cradle to grave” business, as it has something to offer to every age group. After underperforming for several years, I believe the stock looks like a buy at these levels for the following reasons:
- Disney’s streaming losses have narrowed, and the company expects the business to turn profitable in the next fiscal year. It has hiked Disney+ subscription prices in the U.S., and simultaneously launched an ad-supported tier - which should help to further improve its financial performance. Disney plans to launch the ad-supported tiers outside the U.S. later this year, beginning with Europe, which should help increase its subscriber count.
- During the previous earnings call, Iger stressed that Disney would meet or exceed its target of cutting $5.5 billion in costs. Cost cuts have helped companies like Amazon and Meta Platforms (META) improve their earnings significantly, and it seems markets might not be fully appreciating Disney’s cost-cutting efforts.
- Disney is expanding its international parks, and is adding a line inspired by the popular Frozen franchise in Paris. A similar Frozen-inspired expansion in Hong Kong is expected to be operational by the end of this year. Over in Shanghai Disney Resort, a Zootopia-inspired expansion is expected to go live later this year. The Parks segment is the biggest contributor to Disney's profits, and efforts to make the product proposition even better for customers bodes well for the company.
- From a valuation perspective, DIS stock trades at a forward price-to-earnings multiple of 22.8x, which is quite reasonable. As the company’s streaming business moves towards profitability, the stock should see a significant rerating.
Finally, I believe the market sentiment toward Disney is quite negative ahead of its fiscal Q3 earnings. With the bar set rather low, there's a greater likelihood for a positive post-earnings share price reaction if Disney comes up with a decent set of numbers. Plus, with the U.S. economy showing signs of resilience, beaten-down shares like Disney might play catch-up with broader markets in the coming months, even as the tech rally takes a breather.
On the date of publication, Mohit Oberoi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
