Walt Disney (NYSE:DIS) CEO Bob Iger’s resignation took shareholders by surprise.
But there was a bigger surprise on the earnings call. That was the naming of Bob Chapek, head of the parks unit, as Iger’s successor.
Iger, 69, had promised to stay on past his retirement in 2017, to manage the acquisition of Fox’ programming assets. But his promise only held through the end of 2019.
The hard work of integrating what he built now falls to Chapek, who ran the consumer products unit before taking on parks in 2015. During 2019, parks and resorts became the biggest unit of Disney, with more than 35% of total revenue. But media networks, including ESPN and ABC Television, were the biggest profit center.
A Sea of Troubles
Chapek walks into the hot seat with Disney facing a host of problems.
These start with the parks, where revenue grew just 6% last year. The coronavirus from China is expected to hit that business hard. The company’s China attractions are already closed, and the others could close as the virus spreads. And the cherry on top? The company also runs a cruise line.
Chapek oversaw the biggest expansion of parks in Disney’s history, and doubled the size of the cruise line. There may be little he can do to contain virus damage in the short term.
There are bigger problems.
The company’s vaunted direct-to-consumer businesses, which include Hulu, ESPN+ and Disney+, lost $1.8 billion during the last fiscal year. Disney has been bundling the three networks to gain market share, for $12.99 per month. That’s the same price Netflix (NASDAQ:NFLX) charges on its standard plan.
With the acquisition of the Fox studios, now renamed 20th Century, Disney has 40% of the U.S. box office. That sounds great, but the whole business is being disrupted by streaming. Tent pole movies from Disney’s Marvel Studios, Pixar and Star Wars lines could be less important in the future.
Decisions on how to proceed must be made now for 2021.
A Pricey Stock
Iger’s promises of future glory had investors piling into Disney before his resignation.
The market cap peaked at over $260 billion last November. Disney opened for trade Feb. 26 at about $125 per share, a market cap of $230 billion. The trailing price-to-earnings ratio remains high at 21X. Meanwhile, the dividend yield is low at 1.32%.
Disney had $38 billion in debt at the end of September, with its cash balance down to $5.4 billion. After winning the War of the Worlds in entertainment, Disney now looks as vulnerable to a virus as H.G. Wells’ Martians.
Chapek may prove an inspired choice. He is an expert at monetization. Iger said he will remain executive chairman through 2021 as to work on the company’s creative strategy. That leaves Chapek with the task of extracting profit.
Most analysts remained in Disney’s corner as Iger made his announcement, with an average price target of $164.19 — 28% higher than current prices. Expect those price targets to come down as the cost of the virus becomes clear. After the announcement, Sanford Bernstein offered a Disney price target of $141, rating it at market perform.
The Bottom Line on Disney Stock
Disney’s short-term future depends a lot on how bad the coronavirus gets. Chapek’s great success could be an albatross hanging on 2020 results.
Analysts think Disney’s streaming business could be worth an excess of $100 billion, and at 26.5 million subscribers, it looks robust. The launch, however, is helped by bundling. Chapek faces choices on unbundling and price hikes that could slow growth.
Meanwhile, Netflix is at 150 million subscribers, with 61 million of them in the U.S. About 82% of U.S. households have an Amazon (NASDAQ:AMZN) Prime membership. Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) YouTube dominates the free end of the market. Against the Cloud Czars, Disney is financially outgunned.
The old Chinese curse, “may you live in interesting times,” applies to Bob Chapek.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.