A stock that could make your dreams come true

A recovery is under way at this $200 billion company, but there could be further to go if the former boss can work his magic again during a second stint at the business. The early signs are encouraging.

10th April 2024 08:42

by Rodney Hobson from interactive investor

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Entertainment group The Walt Disney Co (NYSE:DIS) has finally seen off an attack by an activist investor and can concentrate on recovering former glories. Although the shares are well off the bottom, it is not too late for investors to consider booking a ticket.

Disney is best known for making films and running theme parks, two businesses that were particularly affected by pandemic shutdowns, leaving the company vulnerable to the unwanted attentions of Nelson Peltz, an American billionaire investor who helped to found investment fund Trian.

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Peltz has been trying to secure places on the Disney board for himself and his nominee, an unwelcome distraction for a management that has enough on its plate getting the group back on track. Chief executive Bob Igor managed to get some powerful voices to vote for the boardroom status quo, including the chief executive of investment bank JPMorgan Chase & Co (NYSE:JPM), film maker George Lucas, former chief executive Michael Eisner and some of Walt Disney’s grandchildren.

Igor has won the battle – for now, at least, although Peltz will remain as a spectre at the feast. He has vowed to respect the wishes of the majority of shareholders after receiving only 31% of votes cast but he has abandoned the fight once before, as recently as February last year when he said he would give Igor time to restructure, then didn’t.

Disney has three divisions. By far the largest is the experiences division that includes theme parks, resorts and a cruise line, the businesses that have the best chance of serious improvement as we leave the pandemic behind. Sports mainly consists of the ESPN television network while entertainment covers television stations such as the streaming service Disney Plus as well as shops and sales direct to consumers.

Disney’s most recent results were encouraging but not yet overwhelming. See Keith Bowman’s expert analysis: ii view: why Disney shares just rallied to 9-month high

Nor will the immediate future be easy. Analysts expect modest growth in revenue at around 3% this year and next. However, Igor has promised to deliver $7.5 billion of annual cost savings and to make the streaming service profitable by September, so shareholders will expect a better improvement in the bottom line. Analysts believe that profits could rise 25% this year and 15% next year, with cash flow getting back to pre-pandemic levels. That expectation has been encouraged by a raising of the dividend in February.

Iger’s strategy has four strands. He aims to get the film studios moving again, make streaming profitable, reposition ESPN to gain top slot in a highly competitive market and to drive the experiences business to perform better. The latter aim should actually prove the easiest, which is good news as this is the largest part of the group. The streaming service is problematic, as it lost $1 billion last year and a rise in subscription fees produced a fall in the number of subscribers.

The shares briefly broke above $200 in March 2021 before a long uncomfortable slide all the way to below $80 in October last year. The stock has now picked up to just below $120, which has twice proved to be a ceiling.

Source: interactive investor. Past performance is not a guide to future performance.

The price/earnings ratio is a massive 72 and despite the dividend increase the yield is only 0.25%. The market is clearly counting on a very big improvement as the year unfolds. It will be an anxious wait for the next set of quarterly figures in May.

Hobson’s choice: Shareholders are taking an awful lot on trust but they could well be right. Igor stepped down once when the business was doing well and came back three years later to pull Disney out of the pandemic mire. He seems to be succeeding. This is not yet a share for income seekers but those who wish upon this particular star could indeed find that dreams come true. Buy if you can hold your nerve.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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