Disney (NYSE: DIS) conjures up warm memories for many people. When you hear the name, you may recall heartwarming movies or magical visits to theme parks.
Yet, Disney has blossomed into a towering media empire, with its reach extending across television networks, streaming services, production studios, theme parks, cruises, and retail operations, among other realms.
However, not all stakeholders were content with Disney’s trajectory and financial performance. An activist investor, Trian Partners, ventured to secure seats on the board of directors, seeking change. Yet, fellow investors apparently favored the status quo, rejecting Trian’s bids and preserving the existing board. With that chapter seemingly closed, Disney’s leadership can now set its sights on fortifying the company’s operations.
Since the year’s outset, the stock has climbed by almost 11%, a tad behind the S&P 500’s 14%. Can investors anticipate superior performance from Disney shares in the long haul, or does the current share price embody excessive optimism?
Image source: Getty Images.
Progress Underway
Bob Iger resumed his role as Disney’s CEO in late 2022, promptly unveiling an ambitious agenda to enhance the company’s profitability. This plan entails cost reductions (including trimming content production), achieving profitability in streaming services, and reinstating dividends.
There has been some headway. The streaming segment, encompassing ESPN, incurred an $18 million loss in the most recent fiscal quarter (ending on March 30), significantly narrower than the $659 million loss from a year earlier.
However, looking beyond the financial figures reveals a mix of outcomes. While there were modest subscriber upticks across various services, the average monthly revenue per paying subscriber, a pivotal top-line metric encompassing fees and advertising, dipped at the domestic Disney+ unit despite raised prices. Hence, it appears that management still has ample ground to cover to secure enduring prosperity in this fiercely competitive domain that features heavyweights like Netflix.
Disney’s overall business recorded a tepid 1.4% revenue uptick. Nevertheless, adjusted earnings per share, buoyed by expense trimming, surged by over 30% to $1.21.
Succession Dynamics
Disney reinstated Iger after his 2020 departure. This move followed disenchantment among investors and the board with his chosen successor, Bob Chapek, under whose tenure the shares slumped nearly 30%.
Although Iger prolonged his tenure with the company, his contract is set to expire in 2026, with retirement on the horizon. Past experiences illustrate the consequences of mishandled successions in corporations. With succession deliberations shrouded in secrecy, the outcome remains uncertain, potentially posing a risk to investors.
The Verdict
The board and management fulfilled their pledge by reinstating dividends, set to amount to $0.45 in July, up from the prior $0.30 payout in December. Nonetheless, with a modest 0.9% dividend yield, investors seeking income might discover superior alternatives elsewhere.
Does Disney hold promise for investors seeking appreciation? The stock may have leaped ahead of itself, particularly in light of lackluster revenue progression and the hazard that any future CEO might fail to generate value for shareholders. Notably, the shares recently bore a price-to-sales (P/S) ratio of 2.1, above the 1.9 multiple at the close of 2023, and traded at a premium compared to the S&P 500’s 1.7 multiple.
Unless a surge in revenue growth materializes, the ship may have sailed for potential Disney stock purchases at present.
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Lawrence Rothman, CFA holds no positions in any of the stocks mentioned. The Motley Fool holds positions in and endorses Netflix and Walt Disney. The Motley Fool abides by a disclosure policy.
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