Disney’s Impressive 11% Surge Reflects Accelerated Growth Prospects

Walt Disney stock (NYSE:DIS) soared by a remarkable 11% during early Thursday trading, delivering its most significant surge since December 2020. This dramatic upswing ensued following an eventful earnings report that witnessed the company exceeding expectations, propelled by successful cost-cutting measures and the assurance of enhanced capital returns through an expanded dividend and the resumption of buybacks.

Disney’s robust initiatives encompass the pursuit of two strategies to deliver ESPN directly to non-cable consumers. These include a stand-alone offering and a streaming joint venture with Fox and Warner Bros. Discovery. Additionally, the company has committed $1.5B in Epic Games to develop fresh Disney digital experiences, all while simultaneously navigating a proxy battle on two fronts. Whew.

Analysis from Seeking Alpha indicates that cost-cutting substantially bolstered the quarter, amplifying profits and setting the stage for capital returns. However, there remains skepticism regarding whether this signals a fundamental turnaround, with Netflix looming as a formidable competitor and a “significant concern” in the content segment.

Observing developments on Wall Street, Needham elevated Disney to a Buy rating, succinctly declaring “The magic’s back.”

Based on “expectations for robust (23%) FY24 EPS growth driven by additional cost savings (>$7.5B), DTC breakeven by 4Q24 with ‘double-digit’ margins at maturity, and 5.5M-6M new subs from Charter (CHTR) in FY2Q, new ESPN Sports JV with FOX and WBD, $1.5B investment in Epic Games (to create DIS video games), 70% of $60B Parks capex will be ‘incremental capacity’ (i.e., added revs), $8B of FY24 [free cash flow], exclusive Taylor Swift concert rights on Disney+, a 50% higher dividend (to $0.45), and >$3B of share repurchases in 2024,” analyst Laura Martin stated.

“In the long term, we believe bundling can reduce churn by up to 50%,” she added, pointing to bundling with the new sports joint venture and eventually bundling the stand-alone ESPN for Disney+ and Hulu subscribers. “Larger bundles lower churn and raise LTV, we believe.” She set a $120 price target, implying 10% upside from Thursday’s already elevated price.

Goldman Sachs upheld a Buy rating, emphasizing that its assessment echoes that of the previous quarter: Disney is making substantial progress across an extensive managerial agenda.

“The most notable area of traction, in our view, is against DIS’s cost savings initiatives,” analyst Brett Feldman reported. “For example, DIS increased its target for run-rate annual cost savings from $5.5B to $7.5B. Management expects the positive impact of these efforts to be reflected in its F2024 [free cash flow], which it estimates at ~$8B. This would represent a material increase vs. $4.9B in F2023 and nearly match pre-COVID cash generation.”

This progress is further facilitated by diminishing losses in direct-to-consumer (DTC), alongside an overall reduction in cash content spending, he added. Goldman Sachs also maintains a $120 price target.

“With several catalysts and new growth initiatives in the pipeline (password sharing this summer, potential partners for ESPN, ESPN DTC in Fall 2025), inflecting profitability in DTC (targeting double-digit margins) … and a revamped slate, we believe growth is poised to accelerate in F24 & beyond,” UBS analyst John Hodulik asserted, forecasting a 23% increase in earnings per share for 2024 and 33% in 2025.

Meanwhile, Morgan Stanley lauded “the return of the earnings compounder” in reaffirming its Overweight rating on Disney.

“The F1Q results saw the continued strength in Parks combine with a faster ramp in profitability at streaming and a more substantive benefit from last year’s efficiency initiatives,” analyst Benjamin Swinburne said. “The result is over 20% adjusted EPS growth, which we think can compound into F25 and beyond.”