Yahoo Finance Disney has its 'mojo back' as Wall Street applauds cost cuts, free cash flow guidance
Disney (DIS) stock surged roughly 7% on Thursday after the company reported strong earnings the previous day and increased its annual cost cutting goal to $7.5 billion, up from the previous $5.5 billion set in February.
Analysts praised the move with Wells Fargo's Steve Cahall writing the company has its "mojo back" — despite the stock continuing to face multi-year record lows and another battle with activist investor Nelson Peltz.
Cahall increased his price target to $115 a share, up from the prior $110 — citing the cost cuts, coupled with positive free cash flow guidance. He reiterated his Overweight rating.
"Disney is our #1 media idea," Cahall continued. "Bob Iger has been under the hood for about a year now, and the strategy is taking shape."
On the earnings call, the company said it expects free cash flow to balloon to pre-pandemic levels of approximately $8 billion in full-year 2024, assisted by lower content spend. Disney expects to spend $25 billion on content next year versus the $27 billion spent in full-year 2023.
Moffettnathanson said the free cash flow guide was the "single most critical take-away" from the report.
"In full-year (FY) 2018, pre-Fox and pre-streaming, Disney generated $10 billion in free cash flow. In FY 2023, that number was nearly half," analyst Michael Nathanson wrote. "We had long focused investor attention on the re-acceleration opportunity in free cash flow and finally Disney provided a glimpse of what is to come."
'Four key building opportunities'
Iger said the company will be focused on "four key building opportunities" moving forward, which will include "achieving significant and sustained profitability in our streaming business, building ESPN into the preeminent digital sports platform, improving the output and economics of our film studios, and turbocharging growth in our parks and experiences business."
"There is still work to do to improve content," Cahall warned. "We expect fewer releases including fewer series versus films to streaming as cash content [spending] comes down."
Disney has lagged competitors at the box office, despite once being the leader in the industry.
TD Cowen said the problems at the studio are more complex than management has depicted, disagreeing with Iger that the issue stemmed solely from a production strategy that focused on quantity over quality.
"Ultimately, Disney’s theatrical run during 2016-19 was unprecedented and is unlikely to be duplicated. However, performance can certainly be better than it has been over the last several years," said analyst Doug Creutz, who maintained his $94 price target and Outperform rating on the stock.
"We think improved performance is not just a case of quality over quantity; it’s going to take some difficult decisions about prioritization for film vs. streaming, a better-curated mix of products in the pipeline, and probably a bit of new blood in the management ranks as well."
The unofficial end of the actors strike should also help on the film side with Iger saying he's "elated" at the tentative deal, reached on Wednesday.
On the streaming side, Disney+ added a whopping 7 million subscribers in the quarter; however, Wells Fargo's Cahall doesn't expect those gains to continue after the company raised streaming prices for the second time this year, upping the monthly price of its ad-free Disney+ and Hulu plans by more than 20%.
Disney reiterated prior guidance that streaming will hit profitability by the fourth quarter of fiscal 2024, "although progress may not look linear from quarter to quarter."
Overall, Cahall said Disney's growth story "is getting easier to see — especially direct-to-consumer," although "long-term margins are still a guessing game."
Similarly, Bank of America analyst Jessica Reif Ehrlich maintained her Buy rating and $110 price target, writing she's "encouraged" by the cost cuts and free cash flow guidance, along with the "strong momentum" of the parks business.
"While several strategic questions remain, we remain confident in Bob Iger's ability to navigate the company through this transition period," she said. "The free cash flow (FCF) outlook was well above our prior forecast and given management commentary surrounding content spending, we believe this positions the company well to sustainably grow FCF in the coming years."
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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