"Think Happy Thoughts"... Peter Pan
This would be no ordinary earnings release. This would be no ordinary earnings call. A lot was at stake. The last CEO (Chapek) had been unceremoniously fired in the wake of an awful quarter that had exacerbated a truly horrendous looking balance sheet. But that was not all. If the numbers were not bad enough three months ago, the earnings call was even worse. "Unprofessional" is the only word that comes to mind in description of that earnings call without getting unprofessional myself in the authoring of this piece.
So it was the "old pro" (Iger) that was brought out of a self-imposed exile. So it was that another "old pro" (Peltz), not impressed in the least, even with this new "old-pro" who was not without fault, that would put pressure on the firm to not just cut costs, but to improve performance up and down the business. This is that story. Let us begin.
"Aw Shucks, Pluto. I Can't be Mad at Ya!"... Mickey Mouse
For the firm's fiscal first quarter, which ended December 31st, The Walt Disney Company (DIS) posted an adjusted EPS of $0.99 (GAAP EPS: $0.70) on revenue of $23.512B. Both the top line and adjusted bottom line results did manage to beat Wall Street's expectations. The revenue print was good enough for year over year growth of 7.7%.
The lion's share of the adjustment ($0.24 per share) was made for the amortization of TFCF and Hulu intangible assets and a fair value step-up on film and TV costs. (TFCF = Twenty-First Century Fox) Operating income decreased 7% to $3.043B, but handily beat expectations. This result was generated by a tremendous boost in operating margin from 11.5% for the year ago comp to 12.9% for the quarter reported. On a GAAP basis, net income attributable to the company increased 15.9% to $1.279B, as earnings per share increased 11%.
Last night, Disney announced a major restructuring and reorganization of the firm, which we will get into in some detail down below. These December quarter results were however delivered under the firm's current organizational structure.
- Disney Media and Entertainment Distribution generated sales of $14.776 (+1.3%), beating estimates. This produced segment operating income of a loss of $10M, which was down from $+808M a year ago, and also beat estimates.
- Linear Networks generated sales of $7.293B (-5.4%), falling short of estimates. This produced a segment operating income of $1.255B, which was down 16.3% from a year ago, but still beat estimates.
- Direct-to-Consumer generated sales of $5.307B (+13.2%), falling short of estimates. This produced a segment operating income/loss of $1.053B, which was down from $-593M a year ago, but still beat estimates.
- Content Sales/Licensing and Other generated sales of $2.46B (+1.1%), falling short of estimates. This produced a segment operating income/loss of $212M, which was down from $-98M a year ago, also missing beat estimates.
- Disney Parks, Experiences and Products generated sales of $8.736B (+20.88%), beating estimates. This produced segment operating income of $3.053B, which was up 24.6% from a year ago, but did beat estimates.
- Domestic generated sales of $6.072B (+26.6%), falling short of estimates. This produced a segment operating income/loss of $2.113B, which was up 35.9% from a year ago, but still missed estimates.
- International generated sales of $1.094B (+27.1%), falling short of estimates. This produced a segment operating income of $79M, which was up from $21M a year ago, and also missed estimates.
- Consumer Products generated sales of $1.57B (-0.2%), falling short of estimates. This produced a segment operating income of $861M, which was down 1.5% from a year ago, but also missed estimates.
"The Past Can Hurt, But the Way, I See it, You Can Either Run From it, or Learn from It.".... Rafiki (The Lion King)
Change two to change twenty-something. Here we go again. At least, this is CEO Bob Iger's restructuring and there are defined goals with an emphasis towards both saving and maximizing. Simply put, the time is crucial, and Disney now has to get back on a track of sustainable growth and profitability, while improving margins through the reduction of expenses.
The Walt Disney Company is reorganizing into three core segments. Those will be Disney Entertainment, ESPN, and Parks, Experiences and Products. Bob Iger has gone out of his way to stress that ESPN is not being isolated in order to be sold or spun out, but instead to group the ESPN network, ESPN+, and ESPN media with the firm's other sports related content globally. ESPN remains a "differentiator" in the eyes of the firm.
The whole idea is to group like content creators and put that creation back at the center of the firm's mission. Unfortunately, past deals such as the Fox deal and the mismanagement of the firm's overreach into streaming had done quite a bit of damage to the firm's balance sheet. The firm is going to have to tighten its belt aggressively.
Last night, Iger announced a cost savings target of $5.5B. About $3B of that will come from the content side ex-sports coverage, which is why it is so important to reorganize and streamline those businesses. The other $2.5B will come from the administrative side and other more general parts of the corporation. This will include a payroll reduction that will likely see roughly 7,000 cast members (employees) lose their jobs.
"To Infinity and Beyond."... Buzz Lightyear
During the call, CFO Christine McCarthy said, "We still expect that revenue and segment operating income growth for this fiscal year will be in the high single-digit percentage range, and we look forward to updating you on our progress as we move forward."
Iger also added during the call that he plans to ask the Board to approve the reinstatement of a "modest" dividend by the end of 2023. Of course, this is a free cash flow dependent question.
The No Fun Fundamentals
For the quarter reported, Disney produced operating cash flow of $-974M, down from $+1.526B for the year ago comp as capital expenditures decreased from $1.619B to $1.181B. This took free cash flow from $272M a year ago to $-2.155B for the quarter reported. That is not a misprint. That is why a dividend is a big maybe.
Turning to the balance sheet, Disney has a cash position of $8.47B, which is down significantly from three months ago, and inventories of $1.83B, which is up small over that same period. All told, current assets are down 7.5% since October to $26.912B. Current liabilities are also down a bit to $27.07B. This puts the firm's current ratio at 0.99, which is less than a hair away from being what I would call minimally acceptable. Sans inventories, the firm's quick ratio stands at 0.93, which is really not awful.
Total assets add up to $202.124B. This includes $92.214B in "goodwill" and other intangibles. At 45.6% of total assets, that is an awfully high number, but then again... this is Disney. I really cannot think of a brand name or a set of fictional characters that could hold a greater level of intangible value. Disney is different in that respect.
Total liabilities less equity comes to $101.989B. Included in this number is $45.128B in long-term debt. Obviously, I cannot love this balance sheet until the cash on hand and the debt-load are more in balance.
While I was writing this piece, Nelson Peltz of Trian Fund Management appeared on CNBC, and in an interview with Jim Cramer announced that his proxy fight with Bob Iger was over.
I have found nine sell-side analysts that are rated at four of five stars at TipRanks and have also opined on DIS since last night. Across those nine analysts, there are seven "Buy" or buy-equivalent ratings and two "Hold" or hold-equivalent ratings after adjusting for changes. Two analysts, one "buy" and one "hold" abstained from setting a target price.
The average target price across the other seven analysts is $128.71, with a high of $136 (Brett Feldman of Goldman Sachs) and a low of $110 (Kannan Venkateshwar of Barclays). Once omitting the high and the low as potential outliers, the average across the other five rises to $131.
Very solid quarter, considering. Much improvement found across many metrics now that Bob Iger has been back at the helm for about two and a half months. As readers know, I am long Disney and I consider it an investment. That does not mean that I don't trade around my positions. I have nothing against taking a profit on a partial this morning even is staying long. In fact, I sold a few shares last night.
Readers will see that DIS had broken out of a long-term downtrend as the calendar turned. The shares are now sneaking up on a 38.2% retracement of the entire late 2021 through all of 2022 selloff. That would be accomplished at the $131 level, which just happens to be Wall's Street's consensus target price. (It's almost as if we all look at the same charts.) Let's zoom in.
I almost saw a double bottom but decided that the pattern was too small. What I do think I see is a still underdevelopment cup pattern that begins at $131 (left side of the cup), which is currently our pivot. That would put my target price at $150. Probably unrealistic. So, what we look for now, is for a handle to attach itself to the cup. Once that happens, the pivot moves to the right side of the cup and changes the target price. This is also when opportunity strikes for the bulls.
Add to my long today? Of course not. I just sold some on last night's pop. Add on the dip created when the chart adds that handle? Certainly. Or maybe try to get paid to wait. An investor could go out two months and sell (write) April 21st $105 DIS puts for about $2 this morning.
The stock's current 200-day SMA (simple moving average) is about $102. That's probably where there would be exceptional support, and that line might be up to or above $103 by expiration. That would also be the investor's net basis and is forced to eat the shares in April.