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Disney’s (NYSE: DIS) highly anticipated fiscal fourth-quarter earnings report finally hit the wire Wednesday night. The numbers showed the company is still facing challenges in its transition from linear TV to streaming, but also showed signs that the worst of its turnaround seems to be behind it.

Its loss in its direct-to-consumer segment, comprising all of its streaming services, including ESPN+, was $387 million, compared to a loss of $1.47 billion in the quarter a year ago. Disney narrowed that gap by both growing revenue from its streaming business and cutting costs.

International Disney+ subscribers jumped by 6.4 million from the quarter earlier to 66.1 million, driving much of the growth in its core streaming business.

On the earnings call, CEO Bob Iger noted that the new ad tier is gaining traction with 2 million new ad-tier subscribers in the quarter and more than 50% of new U.S. subscribers choosing the ad-supported product. Ad-tier subscribers also spent 34% more time watching the service than ad-free subscribers, another endorsement for the advertising strategy.

Disney’s results were good enough to give the stock a boost after hours, but what should really get investors to take a closer look at the stock is management’s commentary on fiscal 2024.

Image source: Disney.

The turnaround plan is clear

Nearly a year after he returned to run Disney, Iger said the company had made “significant progress” over the past year, and it hiked its target for cost reductions from $5.5 billion to $7.5 billion. That cost-cutting initiative alone has the potential to add significant value to the stock as $7.5 billion represents roughly 5% of the company’s market and is well above the $3.4 billion in generally accepted accounting principles (GAAP) net income it generated last year. If the company can achieve those cost reductions without a significant impact on revenue, it will add huge profits to the bottom line.

Iger called out four key pillars in the turnaround strategy:

Achieving significant and sustained profitability in streaming.
Making ESPN the leading digital sports platform.
Improving the product and economics in its film studios.
Accelerating growth at its parks and experiences business.

With the help of those initiatives, the company now expects free cash flow to grow “significantly” from 2023 to approach pre-pandemic levels. It finished fiscal 2023 with $4.9 billion in free cash flow, and in its last fiscal year before the pandemic, the company had nearly $10 billion in free cash flow.

Management also stood by its target of generating a profit in its direct-to-consumer division by the fourth quarter of fiscal 2024.

Iger didn’t comment on any potential asset sales, but that seems to be part of the strategy as earlier media reports said the company was close to selling its Indian operations, which it valued at roughly $10 billion.

Why Disney stock could rally from here

Disney stock touched a nine-year low just weeks ago, a reflection of investor frustration with the struggles in its media business and the continued losses in streaming.

However, after restructuring its business, issuing layoffs, raising prices, and adding an advertising tier at Disney+, the company seems like it’s well positioned to capitalize on those moves in the new fiscal year.

If the company can deliver free cash flow that’s approaching $10 billion, it’s hard to not see the stock as a good value, especially as profits should continue to climb beyond that as its streaming segment continues to grow and it reaps the benefits from a new round of investments in its theme parks.

If you believe Iger, the entertainment business has already done the hard work of getting back on track. The new fiscal year should be about capitalizing on those efforts with improved financial results. With the stock price still low, that means that now is a great opportunity to consider Disney shares.

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Jeremy Bowman has positions in Walt Disney. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool has a disclosure policy.

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