Text size
Disney CEO Bob Iger.
Rich Fury/Getty Images
Disney World may be “the happiest place on Earth,” but
disney
stocks have been on a disappointing rollercoaster ride for investors over the past year, prompting many to take the plunge.
Walt Disney stock (ticker: DIS) has fallen more than 13% in the past 12 months, even as the
jumped to double digits. The difference put a dent in CEO Bob Iger’s halo and left at least some investors wondering if he wasn’t the savior they hoped he might be when his the return to the company has been announced end of 2020.
The House of Mouse is currently facing several high-profile issues, such as pressure on its streaming unit, Disney+, Actors and Writers Union strikes in Hollywood, declining attendance at its theme parks, lackluster TV assets and debt levels. That doesn’t even touch on Disney’s recent involvement in the culture wars.
Yet despite all this, others think it doesn’t make sense to switch horses along the way.
Shares jumped last week after Disney has extended the CEO’s contract until at least 2026. However, this proved to be a temporary reprieve: Disney stock closed at its lowest level in 2023 Monday. Succession plans clearly remain a relevant concern for Disney, as Iger is now in his early 70s.
For Dave Novosel, senior investment analyst at corporate bond research firm Gimme Credit, that’s the least of Disney’s concerns. In fact, despite all of Iger’s controversial moves – and his own skepticism – Novosel thinks it would make more sense for Iger to stay than to add yet another problem to the pile – and another executive departure.
In a Wednesday note, Novosel says Iger’s previous run as CEO, from 2005 to 2020, was largely successful as measured by stock performance, but it’s unfair to put all of Disney’s problems at the feet of fhead of towards Bob Chapek.
After all, Iger “had a direct involvement in Disney’s current strategy,” he says. “For example, getting into the streaming wars was his idea.”
Media companies ignore the power of streaming at their own risk. But from a subscriber perspective, Iger’s model of offering low prices and a bargain of content has clearly resonated with consumers and generated nearly 158 million Disney+ subscriptions. Still, the acquisition process has been costly: Disney’s direct-to-consumer segment, which includes Disney+, posted a loss of $4 billion last year. In the meantime, the ongoing strikes by the Screen Actors Guild and the Writers Guild of America That means Disney must delay production of new content, a key part of the company’s 2024 streaming goal to generate profits.
This contrasts with
netflix
(NFLX), which reported better-than-expected second-quarter earnings of $3.29 per share on Wednesday night, and said it added nearly six million subscribers.
Netflix, of course, had a huge lead over Disney when it came to streaming, and has gone through its own periods of fluctuating profits in the past. And while Netflix is the second most popular streaming service by screen time share in the United States, as measured by Nielsen data, behind only YouTube, the company noted in its shareholder letter that “there’s a pretty competitive battle going on” between the streaming giants, a battle that has required a lot of investment from all the major players.
by Disney recent layoffs are emblematic of how costs skyrocketed during Iger’s tenure. Novosel writes that fiscal 2022 Ebitda — or earnings before interest, tax, depreciation, and amortization — margins were less than half of those generated by Disney in the period from 2014 to 2018, which were largely impacted by Iger’s decision to buy a huge piece of assets Since
Fox Corporation
(FOXA). Fox Corp is run by the Murdoch family, which also runs News Corp (NWSA), which owns Barrons publisher Dow Jones.
It’s not just content and cost issues that haunt Disney: The company’s desire to sell its linear TV assets, such as ABC, raises the question of who would want to buy them. Similarly, there is no obvious partner for ESPN, owned by Disney, which is not for sale but saw the price of sports rights continue to climb. It comes amid a drop in attendance at Disney theme parks – a former bright spot – and a lukewarm box office record for recent movie releases.
Novosel expects Ebitda to rise this year, allowing Disney’s debt to decline, but he says that would come with some big caveats: Not only would Disney have to spend a lot on aspects of its business like theme parks, but cash flow could be hampered. if the company soon restores its dividend. Additionally, Iger has made it clear that he prefers Disney to keep Hulu in its portfolio: if Disney were to buy Comcast (CMCSA) out of its 3% stake in the streaming platform for some $9 billion, Disney’s leverage could skyrocket.
It’s no wonder, then, that Novosel has maintained an Underperform rating on Disney’s debt. Succession plans may remain a big deal of uncertainty, but Disney investors have enough to worry about not having to focus on what will happen to the corner office three years from now.
Write to Teresa Rivas at teresa.rivas@barrons.com
