Maybe It’s The Bob Iger Company, Not Walt Disney

Summary:

• Bob Iger is back, bringing a lot of excitement and scrutiny to Disney.
• I offer my thoughts on his return, including that cutting costs may be his biggest role.
• A main risk: Iger’s specialty is the acquisition strategy, but he may not be able to do that at the moment.
• One significant strength: as D+ introduces advertising, he can use his experience at ABC to guide the process.
• Disney stock continues to be a long-term buy, but average-in carefully during the bear market.

Bob Iger recently returned to Disney (NYSE:DIS) by request of the board. Chairman Susan Arnold believes Iger is more qualified to steward the company through these difficult times than was former CEO Bob Chapek.

I didn’t see this one coming, to be honest, as Iger seemed to clearly want to leave at the end of 2021, after previously resigning as CEO back in 2020 and hanging on for a while longer on the board and as a creative exec. (I would think, too, that he will end up staying beyond his current two-year contract.)

In this article, I will offer my thoughts and comment how his new tenure could ultimately affect the company and the stock, the latter of which I consider a long-term investment idea on pullbacks (the actual Iger-is-back trade is over, obviously, and was only for the quickest of buyers/sellers anyway).

Bob Iger: CEO Again

One of the biggest issues facing Disney is the new inflection point reached in the streaming wars. It used to be that investors wanted to get prime valuation based off the growth in subscriber count; don’t worry, that’s still important.

But there is concern over profitability, and that is the new yardstick by which Wall Street will measure the multiple applied to the various media companies offering scaled-up streaming entities.

Disney saw the huge segment loss on its income statement related to D+ and its triple-package bundle (filled out by ESPN+ and Hulu) and panicked at the reaction to it by investors/traders. While revenue expanded by 8% to $4.9 billion, the operating loss associated with that top line was just under $1.5 billion, and that compared to a loss of $630 million one year prior. For the full fiscal year, the direct-to-consumer red ink was $4 billion versus $1.7 billion. Subscribers for D+ did rise by slightly over 12 million signups, but average revenue divided by total subscribers for the various services aren’t exactly rising parabolically. As an example, D+ global users are down in ARPU by 5%; D+ for United States/Canada declined in the metric by 10%.

The aforementioned red ink was said to represent peak losses, as in, things can only get better from here. Perhaps.

Nevertheless, the Iger signal was activated during the stormy times, and the erstwhile weatherman was on his way back in a flash.

The stock reacted positively to the news, but the Iger-is-back trade is basically over; now comes the real work. What exactly is Bob Iger’s intent? What is he focusing in on as a strategy?

It May Be About Costs Now, Not Acquisitions

It would be difficult for Bob Iger to perform another acquisition miracle considering the company’s balance sheet; that must be killing him considering acquiring assets is his specialty (it’s arguably hard to find a suitable one these days in Hollywood for a company such as Disney).

Disney currently has $45 billion in long-term debt. Free cash flow was down 10% and well over 40% for the fourth quarter and fiscal year, respectively, not amounting to much more than $1 billion in either case. Put an expensive acquisition on top of that? In an inflationary environment where the stock is still in dividend-pause mode?

Nope. Instead…it may be about cost-cutting at this point.

You wouldn’t think Iger would come back just to figure out what corners should be cut, but that may indeed be the focus of his attention. According to this SA news item, he has basically ruled out consolidation by revealing that he likes the state of the company’s current portfolio and agrees with the decision to forego hiring for the time being. Restructuring seems to be a key goal as well, and that will come with some accounting costs.

That last link offers some highlights of the latest annual filing, and what is interesting about some of the details is that it places streaming first. Specifically, it says that Disney “significantly increased its focus on distribution of content via our own (direct-to-consumer) streaming services.” That’s obviously expected, but the filing even brings up the whole day-and-date theatrical thing, implying that this would still be a part of the plan.

I am going to assume that’s merely an artifact of obsolescence left over from the Chapek administration because all indications are that Iger wants to return control to the creatives as far as distribution is concerned. Previously, Chapek centralized platforming decisions, but Iger intends, by my read, on changing that entire division, and I take that to mean that there will be more films with theatrical releases as opposed to day/date shifts. I would further assume that the company will now lean toward getting more films in theaters as opposed to making them exclusive to D+. Why? Because makers of content would rather have the prestige of silver-screen status as opposed to smaller-screen consolation. As an example, I would be surprised if Pixar projects bypass the multiplex in favor of D+. Plus, in terms of the cost strategy, theatrical revenue will help to offset expensive budgets and marketing campaigns.

Iger seemingly, and hopefully, will figure out ways of guaranteeing that not only was the $1.5 billion loss representative of a top in red ink, but also it marked a point where decreases in losses will accelerate. It’s going to be tough, and I expect we will see variable quarters where costs simply can’t be wholly contained as spending on content rises and falls over time.

All of this talk about costs and streaming profitability leads to the question of talent quotes versus ROI. The challenge is – as it seems to always be in Hollywood – that great talent comes at a price. I suspect it may ultimately come down to volume of content versus quantity of content. Many may recall that Iger was a proponent of a lower-volume strategy when D+ was initially designed; as time proceeded, Iger recognized the need to move beyond just Star Wars and Marvel trademarks. The Fox IP purchase was in large part meant to supplement Mouse IP. Lowering volume levels and going for quality may be one way of addressing costs.

Iger wants to mend fences and increase profitability. Let’s think about what it may mean for the stock.

A New CEO Can Be A Catalyst – Especially This One

Right now, SA continues to rate Disney as expensive. Revisions are likewise not headed in a positive direction.

Here’s the main risk I see with Iger: as I stated earlier, buying assets was the main weapon in his managerial skill set. He really doesn’t have the ability to exploit a new acquisition strategy so he’ll need to figure something else out. I don’t believe he is likely to sell anything, either, so convincing the Disney troops that they may have to do with less will be the priority. As such, he has a difficult road ahead, because clearly he is more used to welcoming a new asset full of valuable IP into the Disney fold, and welcoming it when such a transaction was new and on the upswing. Lucasfilm/et cetera are arguably maturing to some degree and facing a very challenging environment as premium streaming loses a bit of its focus in favor of advertising-supported streaming.

One of his main opportunities perhaps is to release films with marketing campaigns that rely more on cross-promotion within the company than marketing on competing platforms. Talent naturally wants advertising everywhere all the time to ensure box-office milestones are hit and subsequent bonuses dispersed. I’m not really sure he’d engage a marketing campaign strategy as conservative as that, but it almost is either that or release fewer films into the marketplace…and Disney can’t go down that road because streaming needs theatrical output. This brings us back to the argument of expensive theatrical openings versus inexpensive streaming exclusives for film projects…it’s essentially a catch-22.

Iger might also simply go for cheaper programming on D+, perhaps focusing less on scripted content and more on unscripted/documentary-type stuff. Funny, because that would be reminiscent of former Disney CEO Michael Eisner’s school of managing, for those who recall the latter’s use of stuff like Who Wants to Be a Millionaire as opposed to expensive fictional shows on ABC.

Another important area upon which he may thrive is the D+ advertising-supported tier. Iger obviously knows the advertising industry, as he used to be a high-level executive over at ABC and actually came to Disney via the Capital Cities/ABC acquisition during Eisner’s tenure. He certainly will know how to steer this new initiative, and since Chapek seemingly didn’t have the same level of experience and feel for this particular business, this can only be an advantage stemming from the CEO swap. Iger will be able to add considerable value here.

Nothing definitive has been stated yet as to his plans, but I have to assume Iger plans some content changes both in terms of category of movies/shows given the green light and how much they cost. He’s going to have look at the dreaded spreadsheet at least a little bit, even though Chapek was chastised it seems for doing so.

Bob Iger back in business at Disney is not necessarily the way I would have handled the Disney situation. But I recognize that he has a big following at Disney and on Wall Street, where powerful institutions decide where to place multiple billions of bucks to work on behalf of clients. With Iger back at the helm, he should begin to attract more money toward Disney stock as he begins to share his prescriptions for the business.

The Bottom-Line Question

The bottom-line answer: Disney continues to be a long-term buy. However, given market conditions and risks to the company’s transition from subscriber-growth strategies to profit-growth strategies for direct-to-consumer, pullbacks should be exploited to improve cost basis.

The 52-week range on the stock is $86 versus $160 (at the time of this writing). The stock has bounced back since the market expressed its disapproval over Bob Chapek’s final performance at a Disney earnings call.

There are basically two ways to look at, and play, Disney for most individual investors: very long-term owners don’t necessarily have to be concerned over getting the perfect price. A blue-chip media conglomerate like Disney essentially translates to a great story of unique IP portfolios combined with an iconic theme-park system that can cross-promote itself on multiple linear/over-the-top platforms…there really isn’t another company like it, so buying this stock when it is at least far away from the 52-week high and not necessarily at an ideal valuation should reward handsomely down the road (keep in mind Disney may always come at a premium during any trading session based on its quality-company status). On the other hand, if you are going to be a shorter-term investor, then you need to pay a bit more attention and be patient for deeper trading pullbacks.

To reiterate: I’m calling Disney a buy based on its too-valuable-to-ignore assets; sensitivity to price will depend on time horizon.

The stock and company have taken on new importance in today’s marketplace because of Bob Iger’s return. Additional news flow over the coming weeks will clarify his intended strategies and could also increase volatility in the stock, which might make for interesting buy points.

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Disclosure: I/we have a beneficial long position in the shares of DIS either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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