What is wrong with the entertainment giant Disney?
The Disney brand is known globally and has an iconic status. The company owns unrivaled assets: its theme parks, the world’s most powerful and profitable film studio, a profitable streaming business with a global reach of over 1 billion potential customers, and a preeminent asset in sports, ESPN. But Disney’s stock has been underperforming the broad market since early 2021, when the share price reached over $200. Today, Disney trades below $90 a share.
That said, there are few signs that the Disney board of directors understands that the company has a problem. It is fundamental to corporate governance that the primary duty of the board is to maximize shareholder value. It is not the board’s responsibility to take positions in the culture wars. The Disney board violated its duty to shareholders by tolerating the company’s unnecessary ideological battle with Gov. Ron DeSantis (R-FL) over LGBT matters. Change is needed.
The first steps in turning the Magic Kingdom around include firing CEO Bob Iger. He made a mistake in hiring Bob Chapek to succeed him. Iger thought he wanted to retire, but his ego proved too big. He should be fired because he is more interested in boosting his celebrity status and in Democratic politics than managing a world-class company. A second step is a complete restructuring of the board. The next CEO needs a strong independent board that is interested in maximizing shareholder value, not pursuing political or social causes.
Disney has great assets. Several analysts say the intrinsic value of Disney shares is in excess of $130. Wall Street places a fair value on the shares around $118, about 30% above the current price. New management should thus focus on maximizing returns from Disney’s assets. Disney is investing heavily in the parks. That is great. Disney is right to continue to invest in streaming. In time, Disney can rival Netflix, the clear No. 1 in streaming. No other company can compete with Disney’s programming assets.
Importantly, Disney also recognizes the importance of streaming to its global operations. Its merger with India’s Reliance Industries will produce fantastic returns in the future. The merger will invest in programming with a particular emphasis on the sport of cricket in a fast-growing, cricket-crazy nation of over 1 billion people.
Live sports is must-have programming. Disney has ESPN. The company should continue to divest from linear television and deploy assets to live sports and the ancillary business of sports gambling.
It won’t take much beyond management change to get the Disney share price moving in the right direction. Unfortunately, any significant move up in the share price will probably have to wait until the new calendar year. Disney’s stock will be a source of funds for mutual funds that close their fiscal tax year at the end of October and for individual investors in November and December, the tax loss selling period.
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Wall Street professionals will wait until the middle of December before building positions in the stock. But make no mistake, the mouse will squeak happily again.
Leisure and entertainment are strong global growth businesses.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be reached at [email protected]