Company Reports

Walt Disney has won its proxy battle with Trian and other activist investors, as shareholders elected Disney’s entire recommended slate of directors. Trian and the two nominees it submitted were the biggest threat to Disney’s slate, but since Trian released its very detailed presentation last month, we’ve maintained that the outcome wasn’t nearly as consequential as suggested by the publicity that the contest generated. We’re maintaining our $115 fair value estimate and believe the stock’s recent appreciation now reflects forthcoming improvement, which we expect will occur regardless of which side had won.

Walt Disney intends to spin Star India into a joint venture that will include Viacom 18, a local competitor. Disney’s contribution to the JV, in which it will have a 37% stake, will consist of the Star India assets and some Disney content rights and licenses, for which we expect Disney will earn licensing revenue. While Disney will receive no immediate cash compensation as it would have for selling the operations outright, we think the most important aspect is that it is exiting India and should be better able to focus attention and resources on its core businesses. The Indian operations contributed minimally to our forecast, and we are maintaining our $115 fair value estimate and wide moat rating.

In a fiscal first-quarter report overflowing with news, Disney showed significant progress in several important business lines and offered reasons to be excited. The most unequivocally positive result, in our view, was significant margin expansion. But from a top-line perspective, some of the news, particularly surrounding live sports making its way to streaming and encouraging Disney+ trends, is merely consistent with the ongoing evolution of Disney’s business. As an offset to grand streaming plans, the results in Disney’s linear and licensing businesses were lukewarm to poor. We believe the quarter validates the strength of Disney’s assets and the firm’s ability to survive the evolution of the media industry. However, we don’t think the story has changed. We’re maintaining our $115 fair value estimate and now believe the stock is only modestly undervalued.

Disney is managing the evolution of the media industry, most notably the shift from linear television viewing to on-demand, direct-to-consumer, or DTC, streaming services. Disney was perfectly positioned to take advantage of the traditional model, with its ownership of a national broadcast network, in ABC; the top sports network, in ESPN; and a leading children’s network, in the Disney Channel. These remain very valuable assets that give Disney advantages as the industry evolves, but challenges exist, and we don’t think the new media landscape will be as profitable as the prior one.

Disney, Warner Bros. Discovery, and Fox announced a joint venture to create a streaming platform that will include all of the linear sports content that the firms broadcast. The platform should launch in the fall of 2024 and will include programming from 14 linear networks and a variety of sports leagues. The move doesn't change our fair value estimates—$115 for Disney, $20 for Warner Bros. Discovery, and $43 for Fox. We've expected a streaming bundle and linear sports programming moving increasingly to streaming, and we don't believe this move changes the total monetization pie for sports content.

After taking a critical look at Disney, we are reducing our fair value estimate to $115 from $145 while maintaining our wide moat rating and revising our Morningstar Capital Allocation Rating to Standard, from Exemplary. We believe the stock remains undervalued, but we think the move away from linear television viewing by consumers will keep Disney’s performance from returning to its past glory.

Disney is managing the evolution of the media industry, most notably the shift from linear television viewing to on-demand, direct-to-consumer, or DTC, streaming services. Disney was perfectly positioned to take advantage of the traditional model, with its ownership of a national broadcast network, in ABC; the top sports network, in ESPN; and a leading children’s network, in the Disney Channel. These remain very valuable assets that give Disney advantages as the industry evolves, but challenges exist, and we don’t think the new media landscape will be as profitable as the prior one.

Disney’s fiscal fourth quarter displayed the firm’s financial might and why we think shares remain undervalued despite challenges it faces. Most notably, the firm has cut costs significantly, sending free cash flow skyrocketing. However, TV-related struggles continue, and the headline-grabbing 7 million streaming subscriber additions featured only minimal growth domestically. We question how successfully Disney can funnel its declining linear business straight into its direct-to-consumer streaming offerings, but with such valuable franchises and levers to pull, we feel the market is too pessimistic. We’re maintaining our $145 fair value estimate.

We believe Disney is successfully transforming its business to deal with the ongoing evolution of the media industry.

Disney announced firm plans to invest over $60 billion in its theme parks, resorts, and cruise business over the next decade, roughly double the investment in the segment historically. Management had been hinting at increased capital spending since May by disclosing that the firm would spend $17 billion to expand the Orlando resort and add three new cruise ships during fiscal 2025 and 2026. As a result, we were already projecting elevated capital spending of $5.8 billion on average from fiscal 2024-2028 versus an average of $4.4 billion from fiscal 2018-2022. Given the longer timelines for these capital-intensive projects, we expect spending will skew toward the end of this period. We are maintaining our $145 fair value estimate.

We believe Charter and Disney have come to a reasonable agreement to restore most Disney television channels to Charter customers. Disney is taking its first step in more closely tying its streaming strategy to the traditional television business. We expect other media firms will follow suit in the coming months to slow the decline of the traditional television customer base, which still delivers the majority of profits across the media industry.

Disney posted a solid fiscal third quarter as streaming losses continued to shrink, but Disney+ and Hulu delivered very weak subscriber numbers. Even as the streaming segment remains on course to break even by the end of fiscal 2024, we still believe Disney needs to drive stronger top line growth to replace declining linear networks revenue. While the just-announced price increases are one lever for driving revenue growth, we think subscriber growth will also be required over the medium term. We are maintaining our $145 fair value estimate.

In a thoroughly unsurprising move, the Disney board extended CEO Bob Iger’s contract for two years beyond the original two-year term until the end of 2026. As we predicted upon his return last year, the original two-year term was too short for Iger to both correct the ship at Disney and simultaneously run a search for his successor. While we believe that Iger and the board both expect his term to end in 2026, we would not be surprised if the two sides decide to run it back for another two years. We are maintaining our $145 fair value estimate.

Disney posted a disappointing fiscal second quarter as CEO Bob Iger has begun to make his mark. Parks remained impressive with strong top- and bottom-line results and streaming losses continued to shrink, but Disney+ lost subscribers and Hulu posted very modest gains. While the direct-to-consumer segment appears on the way to profitability by the end of fiscal 2024, we think Disney needs to expand the DTC customer base and drive stronger top line growth to replace declining linear networks revenue.

We believe Disney is successfully transforming its business to deal with the ongoing evolution of the media industry.

We believe Disney is successfully transforming its business to deal with the ongoing evolution of the media industry.

Disney reported a decent start to both fiscal 2023 and CEO Bob Iger’s second stint in office as parks continued to post strong results and streaming losses moderated. As expected, Iger announced a substantial cost reduction plan with savings of $2.5 billion in noncontent costs, including roughly 7,000 job cuts, and a $3 billion reduction in nonsports content spending. Attached to this plan is yet another restructuring as Iger will dismantle former CEO Bob Chapek’s centralized media division to return more creative and financial control to creative division heads. As a result, the firm will have three segments—entertainment; ESPN; and parks, experiences, and products. The parks division will be the same as currently structured while ESPN will be run as a separate segment for the first time. Iger made certain to point out that the separation of ESPN does not indicate a potential spinout or sale. We are maintaining our $155 fair value estimate.

Nelson Peltz and his fund, Trian Partners, kicked off a proxy fight with Disney over a board seat for the activist investor. The fund is concerned about numerous perceived issues at Disney, including weak governance, financial underperformance, and poor capital allocation. We suspect that the decision to offer a board seat to Third Point in September pushed the board to resist adding another activist to the lineup. Outside of handing Peltz his desired board seat, we believe this proxy fight was basically inevitable.

We believe Disney is successfully transforming its business to deal with the ongoing evolution of the media industry.

In a stunning move, Walt Disney's board reinstalled Bob Iger as CEO of the firm on Nov. 20 with Bob Chapek stepping down immediately. Iger had served as Disney’s CEO from March 2005 to February 2020 and executive chair from February 2020 to December 2021. Iger signed a two-year deal to serve as CEO to set the strategic direction for the firm and help find a successor. While Iger and the board will work together to identify the next CEO, we would not be surprised if Iger extends his stay, as he previously delayed his retirement three times in his first stint as CEO.