The Walt Disney Co. (DIS, Financial) is nearly 30% down in the past year, with several issues pressuring the company, including a third-quarter earnings report that revealed fewer Disney+ subscribers amid escalating competition. On Thursday, it closed at $82.47, its lowest level in nine years.
The entertianment giant has captivated hearts and ignited imaginations for decades and has always been synonymous with magic, storytelling and innovation. However, even the most iconic brands sometimes find themselves at a crossroads, seeking to rekindle their brilliance and recapture the enchantment that once defined them.
As the curtain rises on this transformative chapter in Disney's history, investors have a unique opportunity to be part of a narrative that could rewrite the future of entertainment.
Third-quarter report: A tale of revenue growth, restructuring and creative rebirth
The most recent earnings release conveyed inconsistent signals throughout. Specifically, Disney's third-quarter financial report for fiscal 2023 showed a 4% increase in revenue to $22.3 billion. In stark contrast to the 77 cents in earnings per share from the same quarter last year, the company recorded a loss of 25 cents per share from continuing operations. Adjusted earnings per share were $1.03, a small 5.5% decrease from the prior year.
Disney+ subscribers fell, while the direct-to-consumer sector increased revenue and cut operating losses. Utilizing well-known brands and franchises, investigating a seamless one-app experience and considering options like sending ESPN's primary channels straight to customers are all part of the strategy.
Restoring creativity, being cost-effective and meeting evolving expectations are the main goals of the plan. The business also places a focus on profitability in its streaming division with the launch of Disney+ ad-supported and bundled subscription choices.
The reorganization strategy implemented over the past eight months under the direction of CEO Bob Iger strives to solve issues brought on by shifting customer tastes and market dynamics.
Nevertheless, Disney is well-positioned for long-term success in the entertainment industry thanks to its tenacity in the parks, experiences and products area and dedication to innovation.
Why Disney could be an interesting turnaround case
Disney can be considered a turnaround stock for a number of reasons.
First, despite facing losses initially to establish Disney+, the direct-to-consumer segment's operating loss has narrowed significantly. The company anticipates the segment's profitability by the end of the following year. Cost controls and price increases for streaming services indicate a positive trajectory.
Second, Disney remains a dominant player in the film industry, with several high-grossing films in 2023. Its global appeal has enabled movies like "Elemental" to thrive internationally despite modest U.S. box office performance.
Third, the contract extension for Iger provides a more extended timeframe for executing the turnaround strategy. This allows for better asset management, long-term improvements and succession planning.
Despite challenges posed by the pandemic, Disney's theme parks business continues to excel. Revenue and operating income remain significantly higher than pre-pandemic levels. Expansions in international resorts further contribute to growth prospects.
Additionally, the stock is trading at historically low valuations. The projected earnings multiple for the upcoming fiscal year is only 17 times, which drops to just 10 for fiscal 2027. The increasing streaming service prices align with industry trends and signal improved profitability.
Next, the transition from traditional media to streaming has impacted the industry, making media stocks less attractive. However, Disney's strategic price increases and market leadership position it well for a potential recovery.
Finally, Disney has historically commanded a market premium, and its current lower valuation could offer an opportunity for investors seeking a turnaround play. The company's reputation and potential for profit growth contribute to its appeal.
While challenges remain, these factors suggest the company's strategic initiatives and growth potential could position it as a turnaround stock with future upside potential.
Valuation amid triumphs and trials
Disney's valuation presents a complex picture marked by both positive strengths and challenges. On the positive side, the company boasts a powerful position in the entertainment industry with a unique combination of assets, including theme parks, film studios, a vast content library and a rapidly growing streaming business.
While the stock has faced significant declines, it remains a dominant force in the media and entertainment industry. Most of the difficulties it faces are shared by its competitors, suggesting these issues are industry-wide rather than exclusive to Disney. The potential for Disney to reestablish itself as a growth-focused company and a top blue-chip stock is a realistic prospect, though it may take a few years to fully materialize.
Given its historical strengths and long-term opportunities, the current valuation of the stock, which is trading at 22.4 times forward earnings, could be an attractive entry point for long-term investors who believe in its ability to rebound over time.
Disney is currently trading at a significant discount to its GF Value of $160.56. With a current price of $82.47, it is also well below analysts' target price of $109.38, indicating potential upside. Further, the price-earnings ratio of 67.05 suggests the stock may be overvalued compared to its earnings.
Takeaway
Amid challenges, Disney's strength in parks, experiences and innovation persists. Turnaround factors include Disney+'s narrowing losses, movie industry dominance, extended CEO tenure, thriving theme parks, attractive valuation and industry recovery potential.
The road to recovery is not without challenges, as evidenced by the recent box office and streaming setbacks. Ultimately, the company's ability to communicate and execute its turnaround strategy, as well as navigate the evolving entertainment landscape, will play a critical role in determining its future trajectory.
