The recent proxy battle between the Walt Disney Company and Nelson Peltz thrust shareholder discontent into the spotlight, underscoring concerns about the company’s performance. While activist investors like Peltz often come under fire for their short-term focus and disruptive methods, Disney’s struggles over the past four years warranted closer scrutiny. Peltz mounted a robust campaign, rallying support from notable investors and proxy advisers. Despite falling short with just 31% of the vote, his challenge resonated loudly, serving as a clear signal to Disney’s management that shareholders are clamoring for tangible results.
The dissatisfaction with Disney’s performance can be traced back to the appointment of Bob Chapek, who was hand-picked by Iger as his successor. Chapek stepped into the role on February 25th, 2020, just as COVID-19 began its global spread. The pandemic-induced shutdown of Disney’s parks was particularly challenging as cash flow from the parks was being used to grow the nascent streaming business. In fact, cash flows had shrunk nearly 90% that year, only one year after the $71 billion acquisition of 20th Century Fox.
In an environment where growth was pursued at any cost, fueled by historically low interest rates, investors turned a blind eye to Disney’s cash crunch. The rapid success of the Disney+ streaming service, which amassed a staggering 100 million subscribers in just 18 months, propelled the company’s stock to unprecedented heights. At the time, this strategic move solidified Disney’s position as a formidable competitor in the streaming arena, second only to Netflix. However, as the Streaming Wars intensified and capital costs surged, investors grew increasingly disillusioned with the streaming division hemorrhaging $4 billion in 2022. Consequently, Bob Chapek was ousted from his position, and the esteemed Bob Iger returned to rescue the company and secure his legacy once more.
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Upon his return, Iger had some fires to put out that required his immediate attention. Chief among them was the need to stem the streaming losses, which he did by reducing content spending and raising subscription prices. Additionally, there was a pressing need for diplomatic finesse, as Chapek had ruffled feathers in both Hollywood and Florida.
However, Iger’s return brought with it a sense of reassurance, as his renowned charm and visionary creativity promised to restore the company’s credibility and rejuvenate its studios. Once considered untouchable, the studios lost their way during the pandemic, with even flagship franchises like Marvel and Pixar experiencing a steep decline in box office performance. While some of the enduring challenges, like the lasting impact of the pandemic on movie theaters and industry-wide strikes, can be blamed for the sub-par performance, there is a pervasive sense that Disney’s content engine was broken. If anyone is able to return the studios to their former glory, it is Bob Iger.
Investors are beginning to sense a turnaround, and shares of the company are up roughly 35% year-to-date. The company’s streaming business is expected to reach profitability by the end of the year, and with the improvement, deliver 20% earnings growth for the entire company. As streaming continues to scale, due to higher prices and more subscribers, it is poised to become more profitable than cable ever was.
Additionally, Disney’s theme park business has fully recovered, generating higher profits than pre-COVID. With these promising developments, there is a compelling case for years of robust growth ahead. While Iger is delivering the necessary changes to fix the business, questions linger about who will succeed him, particularly in light of the disaster that ensued following his previous retirement. Investors in Carson’s Mission Opportunity equity strategy have benefited from the stock’s rise this year. However, we believe the turnaround is just beginning with exciting prospects for Disney’s future.
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