Wells Fargo gives a bullish endorsement to a beleaguered Disney. We’re awaiting Iger’s turnaround plan

By Kevin Colleran On Jan 25, 2023

Wells Fargo on Tuesday said it expects Walt Disney (DIS) to “come out swinging” when the entertainment conglomerate reports fiscal first-quarter results early next month. At the Club, we’re slightly more cautious and will be looking closely for a detailed turnaround plan from CEO Bob Iger. When Disney releases its first-quarter earnings on Feb. 8, analysts expect earnings-per-share to come in at 80 cents a share, down 24.5% from the same period last year, while total revenue should climb 7% year-over-year, to $23.35 billion, according to estimates from Refinitiv. “We think DIS management will come out swinging on the F1Q23 call to fend off criticism. We see a refocus on [intellectual property] instead of [subscriber targets], aggressive cost action and the potential for earnings upgrades. We like this setup into the print,” Wells Fargo analysts wrote in a research note. The analysts predicted Disney’s financial performance could improve if the company revives its focus on generating revenue from intellectual property assets like brands, characters and properties associated the classic entertainment franchise, rather than chasing direct-to-consumer subscriber targets. At the same time, Wells Fargo forecasted Disney could announce a roughly $2 billion cost-cutting plan at its direct-to-consumer (DTC) business — mainly comprised of its beleaguered streaming operations — to jump start profitability by early fiscal year 2024. The streaming division includes Disney+, Hulu and ESPN+. Disney launched an advertising tier for Disney+ in early December, but the company has said it doesn’t expect to reap the rewards until later this year. Disney suffered a $1.47 billion operating loss at its DTC unit in the company’s fiscal fourth — a dismal quarter that prompted the board to oust CEO Bob Chapek and return veteran Disney executive Bob Iger to the corner office. The run-up to Disney’s next earnings release comes as Nelson Peltz, the CEO and founder of activist investment firm Trian Partners, has been waging an ongoing proxy battle to gain a seat on Disney’s board. Peltz has said he wants to “work collaboratively with Bob Iger and other directors to take decisive action that will result in improved operations and financial performance.” Disney’s board earlier this month unanimously decided against offering Peltz a seat, according to a recent SEC filing. Trian currently holds a nearly $1 billion stake in Disney. Like other investors — including the Club — Trian has expressed frustration over Disney’s streaming losses, overspending and a share price decline of more than 44% last year. Shares of Disney have climbed by more than 21% since the start of 2023. “Trian wants a higher stock price and is going to push management to decisions that it believes will deliver that aim,” according to Wells Fargo. The bank reiterated its overweight, or buy, rating on Disney, with a price target of $125 a share. Disney closed out Tuesday up 0.29%, at $106 apiece. The Club take Disney’s upcoming earnings will be a chance for Iger to recalibrate the company’s strategy and address some of the pain points investors are worried about, including excess spending, debilitating losses in streaming and a deteriorating balance sheet. If the company announces a robust and comprehensive plan to rein in costs, it could help improve Disney’s profitability over the long run and allow the stock to move higher. As we have argued for months, many companies — particularly those in the technology space — need to make a pivot toward profitability, and we think cost reductions would be well received by the market. We remain guardedly optimistic that Iger, who in his prior postings as CEO and chairman helped generate value for an iconic company, can right the ship at this pivotal moment. But we are also in support of Peltz joining the board because he would push for the cost discipline the company sorely needs. (Jim Cramer’s Charitable Trust is long DIS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Disney World’s Magic Kingdom in Orlando, Florida.

Joe Raedle | Getty Images News | Getty Images

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