Recent decline in household entertainment name is overdone. That’s why we’re buying more

We continue to carefully monitor the fallout from SVB Financial Group‘s (SIVB) Silicon Valley Bank being closed by regulators, with the Federal Deposit Insurance Corporation swooping in to protect insured deposits. It’s an evolving situation with frequent news updates, making it nearly impossible to make a definitive call on whether the broader market might be affected or whether this situation might influence the size of the Federal Reserve’s expected interest rate hike at its meeting later this month.

In the meantime, we did get good news on the jobs front Friday morning that, along with the SVB uncertainty, could push the Fed back in the 25-basis-point rate hike camp. February’s employment report showed the economy added 311,000 nonfarm jobs — more than expected but not nearly as much as January’s big adds. There were also negative revisions from the prior two months. More encouraging, wage growth was not as hot as feared. Rising wage growth has been one major contributor to red-hot inflation.

With Treasury yields pulling back in reaction to all this news, we’re looking through the rubble of the recent pullback in the market, scanning for opportunities in quality companies that have been hit hard lately. A cash position of nearly 9% provides us with the ability to find something to buy, and that’s what we’re doing Friday afternoon. 

The position we’ve decided to add to is Disney. Shares of this iconic media and parks giant are down about 15% since reporting earnings in February despite a big beat and well-received details around CEO Bob Iger’s turnaround plan. Iger acted quickly since his return as CEO, offering a roadmap that balances growth with profitability. This selloff looks overdone to us.

Iger’s strategy was crafted around three main features.

• The first was to reorganize the company and put creativity back at the center of the operations. Disney under-monetized its content under the Chapek regime, and a complete overhaul back to the old ways was necessary to make the business more efficient and cost-effective again.
• The second was the $5.5 billion cost-saving target of which $2.5 billion are non-content costs. Disney’s cost structure got too fat and happy over the years. Realizing these savings will improve margins and returns.
• Third was clarity on the dividend, which Disney has not paid out since the spring of 2020, in the early days of the Covid pandemic. On the earnings call, Iger said he plans to ask the board to approve the reinstatement of a “modest” dividend by the end of this year.

Iger further talked about his turnaround plans Thursday at the Morgan Stanley Technology Media and Telecom Conference. The market may be reacting negatively to some of Iger’s comments around how the pricing strategy at the theme parks may have been too aggressive and the company will look to make its brand more accessible.  But lower prices and reduced crowding at the parks should improve the overall guest experience and keep consumers happy with the brand. Although profitability at the Parks division may have reached a peak, it’s all one big balancing act because losses from streaming are only going to get better from here.

Disney’s strategy is shifting away from a chase-subscriber-growth model in streaming to one that focuses more on profitability. We would not be surprised to see more price increases in the future because the value proposition is high and the product was so underpriced to begin with. In addition, we were pleased to hear Iger highlight revenue growth opportunities of licensing content to third parties. This was something Disney went away from over the past few years to support streaming subscriber growth on its own platforms. But Iger realizes that licensing is an important revenue stream.

Bottom line: Turnarounds don’t happen overnight, but Disney is on the right track to improve profitability and expand margins. That’s why we’re happy to add to our position on the recent dip.

(Jim Cramer’s Charitable Trust is long DIS. See here for a full list of the stocks.)

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