Traders work on the floor of the New York Stock Exchange during morning trading on March 8, 2023 in New York.
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We are buying 40 shares of Disney (DIS) at approximately $94.50 each. After Friday’s trading, Jim Cramer’s Charitable Trust will own 1,200 shares of DIS, increasing its weighting in the portfolio to about 4.44% from 4.3%.
We continue to closely monitor the effects of SVB Financial GroupSilicon Valley Bank of (SIVB) has been shut down by regulators, with the Federal Deposit Insurance Corporation stepping in to protect insured deposits. This is an evolving situation with frequent news updates, making it almost impossible to make a definitive decision on whether the broader market could be affected or whether this situation could affect the size of the Fed’s expected rate hike at its meeting later this month.
Meanwhile, we got some good jobs news on Friday morning, which, along with uncertainty about the SVB, could push the Fed back into the 25 basis point hike camp. February’s jobs report showed the economy added 311,000 nonfarm payroll jobs, more than expected but not as many as January’s large increases. There were also negative revisions from the previous two months. More encouragingly, wage growth was not as severe as feared. Rising wage growth is one of the main drivers of runaway inflation.
As government bond yields pull back in response to all this news, we sift through the wreckage of the recent market pullback, scanning for opportunities in quality companies that have been hit hard of late. A cash position of close to 9% gives us an opportunity to find something to buy, and that’s what we’re doing on Friday afternoon.
The position we decided to add is Disney. Shares of the iconic media and parks giant fell about 15% after reporting earnings in February, despite the big hit and well-received details surrounding CEO Bob Iger’s turnaround plan. Iger has acted quickly since his return as CEO, offering a road map that balances growth and profitability. This sale seems overdone to us.
Year-to-date performance of Disney (DIS).
Iger’s strategy was built around three main features.
- The first was to reorganize the company and bring creativity back to the center of operations. Disney under-monetized its content during the Čapek regime, and a complete overhaul of the old ways was needed to make the business more efficient and profitable again.
- The second was a cost savings target of $5.5 billion, of which $2.5 billion was non-content spending. Disney’s cost structure has gotten too fat and lucky over the years. Realizing these savings will improve margins and returns.
- Third was clarity on the dividend that Disney has not paid since spring 2020, in the early days of the Covid pandemic. On the earnings call, Iger said he plans to ask the board to approve reinstating a “modest” dividend by the end of this year.
Iger further spoke about his plans for change on Thursday at the Morgan Stanley Media and Telecom Technology Conference. The market may react negatively to some of Iger’s comments that the theme park pricing strategy may have been too aggressive and the company will look to make its brand more affordable. But lower prices and reduced crowding at the parks should improve the overall guest experience and keep consumers happy with the brand. While profitability in the Parks division may have peaked, it’s all one big balancing act because streaming losses will improve from here on out.
Disney’s strategy is shifting from a streaming subscription-growth model to one that focuses more on profitability. We wouldn’t be surprised to see more price increases in the future because the value proposition is high and the product was so undervalued to begin with. In addition, we were pleased to hear Iger highlight the opportunities to increase revenue from third-party content licensing. This was something that Disney gave up over the past few years to help grow streaming subscribers on its own platforms. But Iger realizes that licensing is an important source of revenue.
Bottom Line: Turnarounds don’t happen overnight, but Disney is on track to improve profitability and increase margins. That is why we are happy to add to our position on the recent dip.
(Jim Cramer’s Charitable Trust is long DIS. See here for a complete list of stocks.)
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