Shares of Disney Rising about six to seven percent in early morning trading on Thursday
after the company reported it's q1 2023 results a lot happening with Disney this quarter here's
everything you need to know in about 10 minutes my name is Brian Feroldi as the time is recording
I don't own shares of Disney however my three kids do and thank you to Y-charts
for sponsoring today's video so this was q1 of fiscal year 2023 for Disney they have a weird
reporting a period but this is period ending December 31st 2022 the market cap right now is
about 215 billion dollars revenue for the period grew eight percent to 23.5 billion dollars that
exceeded wall Street's estimate management does not give Revenue guidance earnings per share on
an adjusted basis a non-get basis declined seven percent to 99 Cents easily exceeding wall Street's
Target reason one for shares Rising today Disney plus this has become a key metric for investors
to watch Total subscribers was 161.8 Million about 700 000 more than was expected although
this figure did decline sequentially more on that in a little bit margins for the period were mixed
gross margin under pressure due to higher costs dropping to just 30.3 percent operating margin
falling to 8.5 percent net margin did bounce back a little bit to 5.8 percent this is a horrendous
period for a free cash flow production for Disney so net outflow on a free cash flow production was
negative 2.2 billion dollars that is mostly due to non-cast changes in working capital but you
can see negative 2.1 billion dollars in free cash flow for the quarter but 1.3 billion dollars in
net income huge disparity between those two this mostly looks to be a seasonal effect
however the big cash flow outflow uh really took its toll on Disney's balance sheet the
company now just has 8.5 billion dollars in cash 45 billion dollars in debt it's an
ugly balance sheet no worries there this company can easily survive has plenty of access to Capital
now in terms of guidance uh Wall Street was looking for a 1.2 billion dollar loss from
Disney plus the actual operating loss from this division came in at 1.05 billion so smaller than
expected digging into the segments the park and experiences business had a nice quarter growing 21
as the world continues to open up to 8.7 billion dollars and an operating profit basis uh 25 growth
in operating part uh operating profit from this business to three billion dollars so a nice job
in the Parks and experiences business moving over to Disney plus uh core subscribers to Disney plus
were 104.3 uh million this was up year over year and sequentially however Disney plus hot
star business their international business with a huge presence in India this actually declined
sequentially by 3.8 million what is going on there well Disney plus hot star actually
raised prices so they were expecting a decline in subscribers and this brought the overall
growth and subscriber base down for Disney plus that's why the headline there was at what it was
Hulu continues to plot along growing uh slowly ESPN plus had stronger growth year over year and
this remains in a growth mode so nice to see these two businesses continuing to move in the right
direction moving on to other Revenue segments direct to Consumer Revenue which includes Disney
plus this grew 13 allowing overall revenue from the company's cable and video business
to grow about one percent uh year over year as I mentioned above direct to Consumer losses mainly
due to Disney plus grew sharply year over year or about one billion dollars this was slightly better
than Wall Street was expecting what's going on at Disney plus management said higher programming and
production cost combined with increased technology costs slightly offset by higher subscription
revenue and its decline in marketing costs that was the reason for the performance there
in other news Bob Iger returning CEO Bob Iger is making his presence felt announcing a big
strategic reorganization of the company into three primary business units so they're now going to be
having Disney entertainment which is going to include all of the media and content business
around the world including Disney plus and Hulu number two is ESPN which is going to be related
to everything sports that Disney does and then the final category is going to be Parks experiences
and products including consumer products games the resorts theme parks cruise ships publishing
and everything else management expects to start reporting in these three segments by the end of
the current fiscal year so big reporting changes coming Iger also moved quickly to cut 5.5 billion
dollars in costs out of the business and as part of that's going to be reducing its Workforce by 7
000 jobs that is about three percent of its current uh Workforce so this is one reason
why Shares are up management is taking action to reduce its cost where will that 5.5 billion
dollars in cost come from well three billion dollars is going to be on produced and licensed
content spend uh reduction about 2.5 billion is going to be on overhead costs things like
marketing labor and other so management is really focused on becoming much more efficient with its
spending hence by shares we're Rising today Bob Iger also said he's going to ask the board
to reinstate the dividend by the end of this year Disney did cut its dividends slashed it completely
in 2020 due to the pandemic it's looking to reinstate that by the end of this year the
company said it will be a very small very modest dividend to start with and they hope to increase
it over time turning to guidance management is not offering guidance but Wall Street is expecting 14
Revenue growth next quarter and nine percent growth in adjusted earnings per share to about
a buck 18. they said that they are no longer going to guide for subscriber growth however they still
intend for Disney plus to reach profitability by the end of fiscal year 2024 that is the next
fiscal year so about uh 20 months or so from now they expect Disney plus to reach profitability I
assume that's on an operating basis for the full year Wall Street is expecting nine percent Revenue
growth to 90.6 billion dollars and 17 growth in earnings per share on an adjusted basis so what
should Disney shareholders watch moving forward first keep an eye on those Disney plus margins and
Disney plus subscribers this is the growth story at the business and this is going to be driving a
huge chunk of the company's profitability moving forward third keep an eye on operating margins
overall Consolidated operating margins for the business we want to see this eventually Hold
Steady and steadily move higher over time as Disney plus continues to be less of a drag and
the country the world continues to open up from covid Fourth Watch free cash flow we noted that
this was a very bad quarter for the company on a free cash flow basis we do want to see those
rebound when looking on an annual basis overall if you're looking at the moat here it looks stable
potentially growing uh due to the huge success of Disney plus but the company's Mount is probably
to be stable and the thesis depending on how you look at it it could be a yellow flag if you're
worried about Disney plus and the transition away also the continued attack on cord cutting thesis
here somewhere between yellow flag and green flag totally depending on how you're looking at it now
we did run this company through our investing Frameworks keep in mind that Disney is not the
company that kind of scores well on our investing Frameworks it's a mature company it's not founder
lead Etc so it does not score well on either of our Frameworks this is more a limitation
of our Frameworks and the kind of companies we are looking for Disney is obviously a fabulous
large cap of Blue Chip wide moat a business but it just does not score well on how well how we
look and judge companies where is the company on its valuation growth Spectrum well it's kind
of in this weird phase right now where it's very clearly a mature Revenue growth business but the
profitability has been under pressure due to covid due to the business model change and the growth of
Disney plus so when we think through the company's income statement when looking backwards on a
trailing basis it is optimized for revenue and gross profit right now however operating expenses
are elevated what's putting downward pressure on operating income pre-tax income and net income
when we think about Disney moving forward all of these numbers should become optimized over time
as Disney plus becomes less of a drag as those operating efficiencies start to sink in so when I
think about the company's evaluation metrics right now the on a trailing basis it's probably best to
look at price to sales and price to gross profit the p e and price to free cash flow ratios aren't
yet meaningful but the idea is that these numbers should become meaningful over the next year as
the company's type operations become optimized so let's take a look at the company's current
valuation using the sponsor of today's video which is why charge this is a very powerful tool that
we use every single day so let's take a look at Disney's current numbers with those caveats in
mind here is Disney's share price over the last 10 years currently about a hundred and twelve roughly
where it was four or five years ago so it's been a couple years of going nowhere for investors if you
look at the price to sales ratio currently about 2.5 times you can add call it six percent uh to
that so call it like 2.7 times that's towards the historic low over the last 10 years on a price to
sales basis if we look at a market cap basis the market cap is about 215 billion dollars something
like that if you add in the share pop gross profit is about 28 billion dollars some quick
division shows us that Disney is trading at about seven times gross profit uh a decent a number that
doesn't indicate to me that it's super cheap or super expensive it just kind of is what it is
let's take a look at the price to earnings ratio you can see during the 2010s this was a
meaningful number Disney was fully optimized for profit during this period you could use priced
earnings ratio then the pandemic hit and earnings all but disappeared for a long period of time now
earnings are starting to rebound and you can see them starting to rebound here but the p e ratio
for Disney on a trailing basis still extremely high because the company is not optimized for
earnings so this number isn't meaningful yet on a forward basis so using next year's numbers it's
starting to become a more meaningful number Disney currently trading about 27 times next
year's earnings this number slightly elevated given the um business model changes and what's
going on at Disney plus but this should become a more meaningful number over time it's a similar
story for price to free cash flow during the 2010s this was a meaningful number you could
judge this company's value then the pandemic kit free cash flow well plunged it stayed positive
but it absolutely plunged and the free cash flow number is still artificially low due to
the Investments and the business model changes so you can't really read too much into this it
will be a while before we get to more normalized numbers moving on our forward basis so a lot is
happening at Disney right now the business model is under is in transition management
changes Capital return changes I have a feeling that in the long term Disney will be just fine
but given this company is a mature business if I was to become interested as a shareholder I
would want it to be a screaming value so this is a company I would be very focused on the valuation
if I was to become a shareholder hope you enjoyed this review if you were confused at the difference
between net income and free cash flow we do have a video that explains that in more detail you can
check that out if you want more information on that see you at 90 days on this one Brian out