Saturday 11 February 2023

Hollywood Reporter: Bob Iger’s Cost-Cutting, Restructuring Plan for Disney Wins Over Wall Street

Story from Hollywood Reporter:

From a vast business restructuring and Disney+ losing subscribers for the first time to 7,000 job cuts, $3 billion in expected content cost savings and a planned return to dividend payments, Wall Street analysts had a lot to digest in the Walt Disney Co.’s first earnings update since Bob Iger’s return as CEO.

Most liked what they heard and saw on Feb. 8 and gave a thumbs-up to Disney’s new priorities under Iger, including a focus on making the Hollywood giant’s streaming business — with 161.8 million Disney+ subscribers — profitable. And Disney shares, which have traded between $84.07 and $157.50 over the past year, jumped in Thursday pre-market trading, gaining 3.7 percent as of 7:18 a.m. PST to $115.4.

“To Profitability … and Beyond!” Guggenheim analyst Michael Morris wrote in the headline of his post-earnings report, invoking Pixar franchise Toy Story‘s Buzz Lightyear, as he boosted his Disney stock price target by $25 to $140 while maintaining his “buy” rating. “Bob Iger returned to center stage, outlining his view of creative/financial alignment, managing costs, curating content offerings and amplifying the consumer parks experience,” Morris wrote and expressed optimism about the company’s move to three reporting segments, namely Disney Entertainment, ESPN and Disney Parks, Experiences and Products (DPEP). Importantly, “management focused on returning authority and financial accountability to creative leaders,” he noted.

Bank of America’s Jessica Reif Ehrlich reiterated a “buy” rating with a target of $135 a share, noting: “While we are encouraged by Bob Iger’s strategic vision for DIS, this is clearly the first phase in DIS’ transformation, which will require adept execution. Bob Iger has a long, strong track record which provides confidence he will manage this transition for DIS.”

Wells Fargo’s Steven Cahall raised his stock price target by an additional dollar, moving from $115 to $141, while sticking to his “overweight” rating for Disney, which is one of his firm’s so-called “signature picks.” Disney’s earnings update provided “everything the bulls wanted,” he explained. “Bob Iger returned by delivering the goods: cost cuts ($2.5 billion in selling, general and administrative versus our $2 billion estimate plus incremental $3 billion content savings over time), pulling the Disney+ sub guidance, curating the content strategy (i.e. backing off of general entertainment/local), ring-fencing ESPN (new stand-alone segment includes ESPN+), promising to have a dividend this year (albeit modest) and reaffirming high-single-digit growth in fiscal year 2023 operating income. While the future isn’t 100 percent certain, the strategy is: profit.” Cahall also lauded Iger in a pun in the title of his report, writing: “He’s The Profit.”

As the “biggest debate” he identified “flowing through cost cuts.” With $1 billion of the $2.5 billion savings target “baked into the fiscal year 2023 operating income guide,” the remaining $1.5 billion will mostly be realized in fiscal year 2024. “However, Disney did not increase direct-to-consumer (DTC) profit guidance, but rather reaffirmed profitability by the end of fiscal year 2024,” the Wells Fargo analyst highlighted. “Investors are curious why DTC won’t do better sooner. We think the answer is that DTC break-even profit was never going to be easy, so now it’s de-risked versus improved.”

Wolfe Research analyst Peter Supino shared his bullish take on Disney’s update and outlook in a report entitled “Everybody Loves a Winner.” Reiterating his “outperform” Disney rating, he boosted his stock price target by $16 to $133. “Disney and Bob Iger threaded the needle,” Supino opined. “The fiscal first quarter was strong where it needed to be (parks), and management made a convincing commitment to efficiency while keeping its options open.” His conclusion: “With a path to $8 of earnings per share in 2026, we reiterate ‘outperform’ and lift our price target.”

MoffettNathanson analyst Michael Nathanson also stuck to his “outperform” rating on Disney shares, while pushing up his price target by $10 to $130 to reflect “our increased estimates, as well as our belief Disney’s multiple should reflect greater confidence in the company’s trajectory under the leadership of returning CEO Bob Iger.”

He lauded Iger for shooting straight on Disney’s streaming strategy. “It was refreshing to acknowledge that the company had chased subscriber growth at all costs and needed to show much greater discipline about pricing strategies, local market entrances and content investment,” Nathanson wrote. “The acknowledgment that Disney has raised pricing on Disney+ but has experienced modest churn confirms our view that this product is best viewed as a superfan platform.”

He also underlined the importance of streaming to Disney investors. “For us, the investment case for Disney is all about the potential for fiscal year 2025 earnings,” the MoffettNathanson report emphasized. “Currently, we are forecasting fiscal year 2025 earnings of $7.20 (versus $6.41 previously), which now includes an aggregate of $2 billion in streaming profits (up from our prior estimate of $1.4 billion).”

Macquarie’s Tim Nollen dubbed the new vision for the Mouse House “a momentous return,” highlighting that “Bob Iger’s return to Disney features a new strategic focus to restore profitability.” The analyst reiterated his “outperform” rating on the stock, while moving his price target $3 higher to $125. “We expect Disney shares to be supported by momentum and optimism over Iger’s plans and ability to execute,” he concluded. “Bringing back the dividend should help too.”

Meanwhile, Cowen analyst Doug Creutz didn’t change his “market perform” rating and $94 stock price target on Disney on Thursday, summarizing his take on Iger’s reset in the title of his report like this: “Structural Reorg, as Expected, But No Fundamental Changes to the Asset Mix.”

He also discussed the “sweeping changes since Iger’s return,” noting: “He has returned both content and monetization responsibilities to the creative teams. Disney is also changing its reporting structure (for the third time in the past five years) and reporting responsibilities.” About the $2.5 billion in planned non-content cost savings, he highlighted that 50 percent of them will come from marketing, 30 percent on the labor front, meaning the 7,000 job cuts, and 20 percent from technology, procurement and other expenses.

“Disney is well-managed and has many attractive content assets. Disney+ is off to a very strong start, which we believe is the key variable governing stock performance,” Creutz concluded. “We still have reservations about the long-term strategy, particularly the wisdom of the Fox acquisition.”

Jamie Lumley, analyst at Third Bridge, in his commentary after Disney’s quarterly earnings update put the entertainment conglomerate’s streaming challenges front and center. “This earnings cycle is Bob Iger’s first report card after returning to Disney as CEO. He’s started his second stint with some promising results, most importantly cutting losses from the streaming division by almost a third,” he emphasized. “However, the over $1 billion in losses for the streaming division is still a large number. Accompanied with Disney+’s first subscriber losses, there remain a number of challenges for Iger.”

Although Hulu and ESPN+ showed subscriber growth, the gains at both were offset by the losses at Disney+. Lumley noted: “A big question is how much momentum Disney’s ad tier will be able to build. We’ve heard from our experts that Netflix may have rushed its ad-tier launch, which could create an opportunity for Disney to come out ahead when it comes to ad-supported offerings.”

PP Foresight analyst Paolo Pescatore sees the loss of Disney+ subscribers at this stage as a negative. “There’s no way of dressing this up. It’s disappointing when you consider that Disney is still a relative newcomer to the streaming world,” he tells THR. “There are numerous challenges, including the current macro-economic environment and uncertainty with consumer behavior. Other parts of the business also touch consumers in a different, unique way and are performing well. A roller-coaster year awaits all streamers with price rises and users consolidating their telco and media requirements.”

How about Disney’s new strategy? Pescatore highlights the “major shift away from the current approach” set by Iger’s predecessor Bob Chapek, and adds: “The company is returning back to its roots with greater emphasis on content creation and unique storytelling. Iger is back and driven to fast-track the streaming business towards profitability – no easy feat for all greenfield streamers fixated on subscriber growth.”

© 2023 The Hollywood Reporter, LLC.