The return of Bob Iger as Disney’s CEO has proven to be a boon for the company’s shareholders, as evidenced by the Q1 F2024 results. Although top-line growth is absent, other metrics reveal growing momentum that could lead to substantial returns for investors. Disney’s stock is currently trading near historical lows, presenting an opportunity for significant total returns.
In December 2023, Disney quietly resumed its dividend distribution, increasing it by 50% for the summer payout. The company is on track to sustain dividend increases for years, with the outlook further bolstered by share repurchases. The summer 2024 payout is worth $0.45% for investors, translating to a 0.9% forward yield and less than 20% of the earnings guidance, leaving ample room for aggressive increases next year.
Disney’s board has authorized the first share repurchases since 2018, with Iger targeting $3 billion in repurchases this year, about 1.65% of the pre-release market cap. Total buybacks could easily exceed that figure. The report highlights better-than-expected margins driving cash flow and setting the business up for earnings leverage as top-line growth resumes. Growth is expected to resume by the end of the year, accelerating sequentially into 2025.
The company had a solid quarter with revenue of $23.5 billion, which is flat compared to last year, despite being 115 bps short of the Marketbeat.com consensus. The weakness in the Entertainment segment offset the strength in the Sports and Experience segments, which grew 4% and 7%. Entertainment was impacted by a decline in Disney+ subscribers attributed to higher costs. However, higher costs are aiding Disney’s margin, and guidance forecasts that subscriber growth will return.
Iger’s cost-cutting efforts trimmed $0.5 billion in SG&A expenses and helped drive better-than-expected cash flow, free cash flow, and earnings. Adjusted earnings are up 23% YOY, beating the consensus by $0.18, and cost savings are sticky. The guidance forecasts FY earnings to grow by 20%, and the guidance may be cautious.
Several new initiatives suggest revenue and earnings growth will be stronger than currently guided and forecast by analysts. Among them is a deal to package Disney’s sports franchises in a cable bundle with Fox and Warner Bros. Discovery assets. In 2025, Disney plans to launch a stand-alone option for ESPN as it leans into building the brand and expanding its reach outside of traditional television.
Another deal that could impact revenue and earnings this year is a new stake in Epic Games. Disney took a $1.5 billion stake in the 3-D gaming platform and developer engine to build content around a “transformational new games and entertainment universe.” Competitor in the metaverse, Roblox, is tracking for $3 billion in annual revenue, a target Disney will reach quickly, adding 300 to 500 basis points in growth relative to the F2024 outlook.
Analysts are gushing over Disney’s results and outlook. The stock received at least a dozen upgrades or boosted price targets in the first twelve hours after the release, aiding the updraft in the price action. Most new targets align or are above the consensus $109 reported by Marketbeat. The consensus is about 10% above the price action, with another 10% to 15% possible at the range’s high end. A move to the consensus target puts the action near critical resistance, and the Disney market is on track to completing a reversal.
The post-release pop has the market just below critical resistance at the baseline of a Head & Shoulders bottom. The baseline is consistent with a long-term moving average and may cap gains soon. However, assuming Disney’s news continues to be good, a move above this level would be bullish and likely lead to a sustained rally.
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