Can Bob Iger Put The Magic Back In Disney’s Kingdom?

Key Takeaways

• Abrupt About Face Brings Iger Back
• Can Streaming Be Profitable
• Getting a Succession Plan in Place

Over the weekend, Disney announced a major shakeup, ousting CEO Bob Chapek and bringing back former CEO Bob Iger on a two-year contract. Iger had been CEO at Disney from 2005-2020 before retiring to spend time with his family. However, in a year that has seen the company’s stock fall nearly 40%, news of Iger’s decision to return sent shares 6% higher on Monday, closing at $97.58.

In June, Disney’s Board of Directors unanimously voted to extended Chapek’s contract, which was set to expire this coming February. The extension would keep Chapek at the helm of the company until July of 2025. However, following disappointing earnings and a widely questioned, optimistic call with analysts, questions about Chapek’s ability to right the ship began to gather steam.

Disney was hit particularly hard in 2020 by Covid. Its flagship theme parks, which are at the core of Disney’s identity, lost billions when parks were forced to close. In November of 2019, just prior to the pandemic, the company launched its Disney+ service, joining the content streaming market. While Disney provides a compelling offer, and a deep catalog of well known names, it comes at a time when competition in streaming wars is fierce. On their call with analysts earlier this month, Chief Financial Officer Christine McCarthy reported that 40% of their 164M subscribers have the bundle which consists of Hulu, ESPN Plus and Disney+. However, streaming services cost the company $1.47B in the most recent quarter and $8B in total since launching, leading many to question if the company can make streaming profitable by its stated goal of September 2024.

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Currently, media and entertainment distribution accounts for an estimated 65% of Disney’s market cap with streaming accounting for almost 36% of that number. Parks, experiences and products are responsible for about 31% of market cap with the bulk of that number, as you would expect, coming from U.S. theme parks. In their most recent quarter, revenues from theme parks hit a record $7.42B, which was a 36% increase from the year prior. While the performance of theme parks is welcome news, the immediate question facing Disney is one of identity.

Disney+ was launched before Bob Iger stepped down and the endeavor was a part of his strategic vision for the future with direct to consumer offerings comprising an increasing share of business. However, the proliferation of competitors in the space and rising costs have been challenging. At the same time, profit margins at theme parks have also been shrinking. ding to the pressures Iger will face are activist investors and Nelson Peltz’s Trian Fund in particular.

The Trian Fund currently has a stake in Disney worth approximately $800M and is seeking a seat on the Board of Directors for Mr. Peltz. The fund had also initially been opposed to bringing back Iger. It will be worth watching how that storyline unfolds and whether or not it adds another challenge to righting the ship. At the same time, investors will also question what plans are put in place for Iger’s eventual departure. Bob Chapek was handpicked by Iger to be his replacement. In light of how that eventually played out, I would expect added scrutiny for whomever Iger taps to one day take the reins and lots of pressure to spend a good portion of the next two years grooming that person for the big chair.

tastytrade, Inc. commentary for educational purposes only.