Disney (DIS 1.23%) hasn't yet stepped into Cinderella's glass slippers and set off for earnings and share price success. But it could be on the way. CEO Bob Iger isn't waving a magic wand -- but he has made moves to cut costs and boost growth. In fact, in the latest earnings report, Iger said the company may beat its cost savings target.
This year, Disney shares have declined about 3%. Right now, you may be wondering if this offers you an opportunity to get in on the entertainment player at a good price -- or if you should avoid Disney until it shows signs of getting some of the magic back. Let's find out.
Disney in the doldrums
First, let's take a look at why Disney has been in the doldrums. Yes, the company's theme parks remain the world's most visited. And Disney has made significant progress in growing another key area, its streaming services. They fall under the direct-to-consumer (DTC) umbrella.
Last year, the company added almost 57 million streaming subscribers. But the problem was that this aggressive growth came at a cost, with the DTC unit's operating loss growing to more than $4 billion. Clearly, the loss weighed on the entire company, and Disney reported a 47% drop in free cash flow for the year.
In November, Disney called back longtime CEO Iger to set the company on the path to growth, and recently, Disney even extended his term by two years. So Iger will stay through 2026, then hand the reins to a successor.
Immediately, Iger restructured management to offer creative teams more power to see their projects through. He also announced job cuts and said Disney will prioritize quality over quantity when it comes to creating content. In the most recent earnings report, Iger said Disney is set to surpass its cost savings target of $5.5 billion.
A $1 billion improvement
Disney's DTC business also has made progress. In only three quarters, DTC operating income improved by $1 billion. In the third quarter of this fiscal year, DTC reported an operating loss of $0.5 billion compared to an operating loss of $1.5 billion in the fourth quarter of 2022. And Disney is sticking by its goal of profitability for its streaming services by the end of fiscal 2024.
All of this is positive. But challenges remain. Disney still faces turbulence, as its recent movie releases, such as Indiana Jones and the Dial of Destiny, have disappointed at the box office. In some cases, the actual movie may not have struck a chord with moviegoers, but it's also important to remember that many fans these days prefer streaming to the theater experience. And that could continue to hurt Disney's new releases at the theater.
Disney has also reached a turning point with ESPN as it faces a pickup in the cancellation of cable subscriptions. The company owns a majority stake in the sports network. In the most recent earnings call, Iger said shifting ESPN to streaming is "not a matter of if but when." At the same time, Disney also is considering strategic partnerships for the network. Disney's TV networks represent about 30% of the company's overall revenue, so the direction the company takes with ESPN or other TV assets could be critical.
Now let's get back to our question. Is Disney a buy right now? Iger has a solid track record at Disney, having grown earnings and share performance during his last tenure at the company.
And his plan this time around has started to bear fruit. So there's reason to be optimistic about this company over the long term. Still, it will take time to bring Disney from the recovery phase to growth.
As mentioned earlier, Iger's efforts haven't yet lifted Disney shares. Today, they're trading for 22 times forward earnings estimates compared with more than 30 earlier this year. This looks like a very reasonable price considering the company's long-term prospects -- even if recovery and share price growth happen gradually. And that's why this top entertainment stock makes a great buy right now.
