Walt Disney's (DIS -0.04%) turnaround seems to be finally gaining some traction. The House of Mouse delighted investors on Thursday with its latest quarterly report and the stock price jumped 11.5%, its best single-day post-earnings performance in nearly 15 years.
The surge in the stock came as Disney reported strong growth on the bottom line, raised its dividend by 50%, set a date for its flagship ESPN streaming service, revealed a new stake in Epic Games, and said Disney+ would become the exclusive streamer of Taylor Swift's concert film.
Revenue in the quarter was flat at $23.5 billion, which missed estimates of $23.8 billion. However, investors were willing to overlook the lack of growth as revenue shifted to growth businesses like the direct-to-consumer streaming segment, which was up 15% year over year to $5.5 billion, and the experiences segment, which rose 7% to $9.1 billion.
Disney also generated records from its experiences segment for quarterly revenue, operating income, and operating margin.
Adjusted earnings per share rose from $0.99 to $1.22 as management slashed its streaming losses from $984 million to $138 million. Disney is still aiming to be profitable in streaming by the September quarter, and it offered some signs that the business is headed in the right direction.
Adjusted earnings per share are expected to grow by at least 20% to $4.60. Disney is on track to meet or exceed its goal of $7.5 billion in annualized savings; and it slashed selling, general, and administrative expenses by more than $500 million. It's also targeting roughly $8 billion in free cash flow for the year.
Image source: Disney.
Disney CEO Bob Iger answers back
Facing down challenges from a pair of activist investment managers, Trian Partners and Blackwells Capital, CEO Bob Iger brought out his big guns for the earnings call.
Disney made the rare move of declaring a dividend more than five months before it will be paid, and raising it by 50%. It unveiled a partnership with Epic Games, investing $1.5 billion for an equity stake in the Fortnite maker in a move that will bring characters from a wide range of Disney properties to a new games and entertainment universe. The deal helps Disney move into an area -- video games -- where it's historically been under-represented.
Carrying the Taylor Swift concert film also seems like a surefire winner for the company, and investors have been eager for an update on the ESPN flagship streaming launch, which management said will come in the fall of 2025.
Overall, the update showed Disney is making moves on several fronts and has the potential to extend and strengthen its product offerings through new deals like the partnership with Epic. For other entertainment companies, Disney remains an attractive partner.
Can Disney stock keep gaining?
Iger still needs to deliver on the goals above, but the path to get there is becoming increasingly clear. Disney must turn a profit in its direct-to-consumer division, and the company's embrace of a new sports streaming package with Fox and Warner Bros. Discovery and the launch of a flagship ESPN streaming app show the company is fully ready to cut the cord.
It's also rolling out a paid sharing program across Hulu and Disney+, much like Netflix did so successfully, which should help boost its subscriber base by cracking down on password sharing.
Disney was jeered last year when it said it would double capital expenditures in its experiences business, but that's the right move because its theme parks have strong competitive advantages in a business with high barriers to entry. Lastly, the cost-cutting goals look to be within reach after several rounds of layoffs and a restructuring that aligns the business with its priorities.
Within the next year or two, Disney should have a growing and profitable streaming business across sports and entertainment, as well as a strong and growing experiences segment. If it can achieve that, the turnaround will have been a success, and the entertainment stock could be substantially higher than it is today.
