Disney: Why I'm Betting On Bob Iger (NYSE:DIS)

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by Lindsey Francy Mar 24, 2023 News
Disney: Why I

Robert way.

Investment thesis

The Disney Company's cash flow has been affected by the Pandemic in recent years. In the middle of the crisis, the company stopped paying dividends. I think that the company's business will recover after the Pandemic. Bob Iger's return will drive Disney's recovery. Bob Iger has a good track record in running Disney, according to my analysis of the company's financials. The results reinforce my thesis. The valuation shows that the stock is cheap.

Company information

Lucasfilm, Pixar, Disney Channel, National Geographic, and many more are owned by the company.

Disney Media and Entertainment Distribution and Disney Parks, Experiences and Products are segments of the company. The majority of the company's revenues came from the DMED segment with the rest coming from DPEP. The only contributor to the company's operating profit was the DMED segment, which had zero operating profit.

Disney results by segments

Disney's latest 10- Q.

Financials

The fiscal year ends on the last Saturday in September. Bob Iger came back to the company as CEO. The results from the last quarter show little evidence of Bob Iger's impact. When reviewing last quarter's results, I would look at management's forward looking plans which were highlighted during the earnings call.

The performance in Q1 FY2023 was better than expected. The top line grew by 8%.

Disney last quarter earnings

Seeking a good source of information.

DPEP reported a 21% increase in revenue to $8.6 billion and a 25% increase in operating income to $3.1 billion for the quarter. Domestic parks and experiences and international parks and resorts drove the growth. Disneyland Paris and higher royalties at Tokyo Disney Resort contributed to the growth of international parks. The closing of COVID -19 resulted in a decline in the number of visitors to the Disney resort.

The total segment revenue is almost flat and the operating income is getting worse.

DMED segment latest quarterly results

There is a company called Disney.

The Linear Networks sub segment recorded a decrease in operating profit due to lower advertising revenues, an unfavorable foreign exchange impact, and a decrease in affiliate program revenues.

The direct-to-Consumer sub segment revenue increased. The operating loss increased. Disney+ had a higher loss despite higher subscription revenue and lower marketing costs. There was a decline in earnings due to higher programming and production costs but this was offset by growth in subscription revenue. Revenue growth from more subscribers and retail prices led to an improvement in the company's performance.

Content Sales/Licensing and Other revenues increased 1% in the quarter, but the operating loss increased. The decline in TV distribution results was due to lower movie sales. The results of home entertainment decreased. The performance of titles released in the current quarter contributed to the increase in theatrical distribution results.

Bob Iger's team has a plan to streamline the business and make it more cost-effective. I expected Mr. Iger to live up to that. He spoke about the team's plans.

Now it's time for another transformation, one that rationalizes our enviable streaming business and puts it on a path to sustained growth and profitability while also reducing expenses to improve margins and returns and better positioning us to weather future disruption, increased competition, and global economic challenges. We must also return creativity to the center of the company, increase accountability, improve results and ensure the quality of our content and experiences.

Creative leaders will be given the power to determine the content, distribution, monetization, and marketing of Disney's core brands. The company will have three core business units headed by experienced leaders and financial reporting will begin by the end of FY23

Disney new segments structure

There is a company called Disney.

With a goal of $5.5 billion in cost savings, the restructuring will result in a more cost effective, coordinated and streamlined approach to operations. The company will focus more on its core brands and franchises while re-examining all markets in which it has launched to determine the right balance between global and local content

Cost savings structure

There is a company called Disney.

Christine McCarthy, the CFO, believes that the company will return on track to pay dividends and declare a modest dividend by the end of 2023.

The direct link between content decisions and financial performance will be restored by the company. Disney+ will focus on achieving profitability and growth by 2024, aligning pricing strategies and marketing initiatives to balance platform and program marketing

Disney business streamlining plans

There is a company called Disney.

I believe that Bob Iger has a very strong record of delivering exceptional operating and financial performance, so I have high conviction that the management team will execute outlined strategic initiatives.

I have high conviction because I have analyzed the company's key financial metrics over the past decade and it is obvious that DIS demonstrated stellar financial performance when Bob Iger was in charge.

Disney financial performance over the last decade

The calculations are made by the author.

During Bob Iger's first tenure, we can see that DIS stock performance was far superior to the benchmark. I am very hopeful that Mr. Iger will return as a CEO.

DIS stock performance against benchmark during Bob Iger's first tenure

There is a company called Disney.

Valuation

There is a mix of multiples analysis and discounted cash flow modeling. Profitability metrics of the DIS are better than median metrics of the sector. DIS has an A profitability grade from Seeking Alpha. I am not surprised that the stock is traded at a high premium.

DIS valuation metrics

Seeking a good source of information.

If we want to understand from a multiples viewpoint, we should compare Disney versus Disney. The current multiples are lower than average. The stock could be worth more than it's worth.

In order to challenge multiple historical analysis, I conduct DCF modeling. I like to be safe and conservative. To round it up to 10%, I use the estimate from gurufocus. I use consensus estimates for revenue for the rest of the year and for the next two years. I assume that the company will widen FCF margin by 100 basis points each year, and that the company's FCF margin will be down to 6 percent because of a very tough year. Historical analysis shows that Bob Iger was able to deliver this FCF margin in the past.

Disney free cash flows model

The calculations are made by the author.

The stock is significantly overvalued with an upside potential of 61%, even with these very cautious assumptions. When I get a huge upside potential, I prefer to run a sensitivity test with more conservative revenue growth prospects. In the first scenario there is a topline CAGR of 5% and in the second there is a 3% revenue annual growth rate.

Disney DCF model sensitivity check

The calculations are made by the author.

My followers know that I cross-check my results with other analysts. The fair value of the company is said to be at $155 per share, which is 40% less than the current market price, and the 12-month target price is $130 per share, which is far higher than the current market price. The chart shows how the stock price correlated with the fair value estimates.

FV estimation of DIS stock

There is a premium for this.

Risks to consider

Bob Iger's strong management and solid upside potential make me believe that DIS has a bright future.

In the event of an economic downturn, consumers may be more cautious in their spending, which could result in lower demand for Disney's products and services. The company's financial performance could be affected by this. The impact on Disney's business could be less than a severe recession because of the mild and short-term outlook. The diversified business model of the company could help mitigate the impact of an economic downturn.

The tough competition the company faces in various segments of its business is one of the major risks for me. In the streaming business, for example, DIS is competing with entertainment giants such as AMAZON and NETFLIX, which have huge resources. Competitors might be able to beat Disney in marketing and content development.

Our rapidly changing world is the third big risk I see. Disney will have difficulty defending its market share if it doesn't keep up with the rapid changes.

Before investing in Disney stock, investors should carefully consider the risks.

Bottom line

Long-term investors will find DIS to be a great investment opportunity. I think Disney is well positioned to take advantage of the recovery in the entertainment industry and drive shareholder value. The results of the model suggest that the stock is worth more than it's worth.