This year is the 100th anniversary of The Walt Disney Company (DIS -0.04%), but it's been a tough 2023 for the entertainment giant. Its stock hit a nine-year low on Sept. 7.
The decline is understandable given the range of its business challenges. Industry strikes by writers and actors are delaying the production of new, revenue-generating content. The fate of its linear television business is in question as consumers move from traditional TV to streaming video. And despite this shift, the company's Disney+ streaming service isn't profitable.
That's quite a litany of challenges, but Disney's share price inched up after a dispute with cable company Charter Communications was resolved this month. With the stock still near a multi-year low, does it make sense to scoop up shares? Absolutely, and the reasons are numerous.
Disney's leadership strength
A key reason Disney can successfully navigate through this turbulence is the leadership of returning CEO Bob Iger. In his previous tenure, he strengthened the company's intellectual property with the acquisitions of the Pixar animation studio, the Marvel superhero universe, and Star Wars creator Lucasfilm. He knows how to leverage these popular titles in the era of digital entertainment, having established Disney's streaming strategy in 2016.
Iger started his career at ABC, so he's deeply familiar with how the linear-TV part of the business operates. And he says he'll rely on Disney's collection of TV studios to provide the content for audiences well into the future, recognizing this TV content is valuable to Disney's streaming library.
And with bids to buy the company's ABC network and other linear TV assets surfacing recently, Iger is the right CEO to make any strategic moves with these assets.
Indications of a rebound
Disney's 2023 is riddled with challenges, but this year's financial performance is a light at the end of the tunnel. A key indicator is the company's free cash flow (FCF), which provides cash to invest in the business, pay down debt, and pay dividends or repurchase shares.
Disney exited its fiscal third quarter, ended July 1, with $1.6 billion in FCF, a dramatic increase over the prior year's $187 million. This followed the second quarter's FCF of nearly $2 billion. This positive FCF trend has the company looking to reinstate its dividend, which it eliminated in 2020 after the pandemic forced much of the company's operations to shut down.
Moreover, the recent FCF increase points to a return to pre-pandemic levels, when the company routinely generated over $6 billion in FCF annually.
Data by YCharts.
FCF is returning to healthy levels thanks in part to rising revenue in its parks, experiences, and products division, which includes its retail stores, theme parks, and other businesses outside of film and television. The segment's third-quarter revenue reached $8.3 billion, a 13% increase over the previous year.
The parks division also produced $2.4 billion in third-quarter operating income, more than double the $1.1 billion generated by its remaining operations, which are grouped under its media and entertainment distribution segment.
To boost the media division's profits, the company is pushing to reach profitability in its Disney+ streaming service by the end of 2024, and it's making progress on that front. Although its direct-to-consumer streaming segment suffered an operating loss of $512 million in the third quarter, that was 52% lower than the prior-year loss.
More signs of a move in the right direction
What's next for Disney? Iger announced organizational changes that carved out sports network ESPN into its own business unit, which indicates how much value exists there. ESPN's traditional TV channels continue to increase viewership despite cord-cutting, and Disney is looking to form strategic partnerships to further boost its revenue, such as experimenting with sports betting.
Meanwhile, prices for the ad-free version of Disney+ are set to increase on Oct. 12 as the service continues its march to profitability in 2024. The price for Disney+ with ads remains the same to encourage adoption at that tier since the service's advertising revenue can increase as its audience grows.
Seasoned leadership, a strategy for the company's future, and strengthening financials set Disney up to recover from its rough 100th birthday year, making the stock a buy.
