Re-Rating Disney: Analysts Eye DTC Victory with Pixar, Lucas, and Marvel in its Corner

Needham analyst Laura Martin reiterates a Hold rating on Walt Disney Co DIS. The re-rating reflects rising DTC losses and Martin's belief that consensus estimates for Disney are too high owing to high investment levels in DTC and another year of weak earnings from linear TV and the box office. 

Longer-term, Martin believes Disney's asset mix of both digital and physical assets (i.e., an Omniverse) maximizes its economic value capture.

Martin sees Disney as the streaming winner in the longer term, backed by superior marketing skills, lower SAC, strong IP franchises, A+ library titles, and world-class storytellers at Pixar, Lucas Films, and Marvel and ownership of its content studios.

Disney best in class library positions it for success in metaverse or AI like ChatGPT.

CEO Bob Iger "won" the battle in Florida against Florida governor Ron DeSantis by promising to invest $17 billion in Florida to create 13,000 new Disney jobs, accusing DeSantis of being anti-business, and defending Disney's point of view by using "freedom of speech and ideas" metaphors. However, Iger's 2-year contract has 18 more months.

Martin believes OTT consolidation will begin in 2023, and Disney will command the highest takeover premium. Martin sees Apple Inc AAPL, Microsoft Corp MSFT, and Amazon.Com Inc AMZN are logical bidders for DIS's 100-year-old brands and library IP.

Disney has promised $5.5 billion of cost savings, including non-content cost savings of $2.5 billion ($1 billion in FY23) and content cost savings of $3 billion. Disney has already announced a 7,000-person headcount reduction. Also, Disney promised peak losses in streaming last year, which should drive faster EPS growth upside in FY23.

Martin highlights Disney's dividend reinstatement potential. Martin believes Disney's natural shareholder base is retail investors wanting to put Disney shares into their retirement accounts. However, this same group of investors often requires dividends to live on. By implication, if Disney reinstates its dividend, a large pool of buyers for Disney shares will return to the stock.

DIS's promised reorganization by YE23 into three core segments (Disney Entertainment, ESPN, Disney Parks, Experiences, and Products) highlights Disney's creative engine at the core of its value proposition. Martin believes the reorganization will aid morale while cutting costs. Also, Martin would like to see Disney auction off a 10% passive interest in ESPN and use that cash to repay debt and use ESPN-specific equity to lower the cash cost per year for the upcoming NBA renewal rights for ESPN.

Price Action: DIS shares traded lower by 0.36% at $98.98 on the last check Thursday.