Wall Street analysts and investors welcomed Bob Iger back as the CEO of the Walt Disney Co. after Sunday’s surprise news that the Hollywood conglomerate’s former head would return to replace Bob Chapek. And experts have already started discussing possible strategic changes that he could usher in.
Disney shares, in pre-market trading on Monday, were up 9.3 percent at $100.29 as of 7 a.m. ET. The stock had hit a 52-week low of $86.28 earlier this month. As of Friday’s market close, it had fallen about 40 percent so far this year. Disney shares were up 9.3 percent at $100.35 as of 9:35 a.m. ET on Monday.
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“Magic is back,” MoffettNathanson analyst Michael Nathanson cheered the return of Iger and upgraded the rating from “market perform” to “outperform,” while raising his stock price target by $20 to $120. “We raise the valuation multiple to reflect our greater confidence in the company’s trajectory under the leadership of returning CEO Bob Iger,” he explained in a Monday report, adding that the company veteran could “help guide the company through this period of massive secular change.” The expert’s conclusion: “We applaud Disney’s board for the courage to make this change.”
Nathanson noted that “we have never hidden our affection for Mr. Iger and the job that he did in building Disney into the global powerhouse that it has become.” He explained: “Over the many years, Mr. Iger’s decision-making and strategic positioning — which ignored the Street’s often incorrect short-term focus — would ultimately separate Disney from the media pack. In addition, his communications skills and his ability to stay focused and honestly optimistic in the face of structural challenges provided a constant ballast in the roughest of media waters. We believe investors will value the transparency and return Disney some of its long-lost magic with a stronger narrative driving the stock higher again.”
The analyst also shared his take on Chapek’s leadership: “We have not recommended the shares since May 2020 for multiple reasons, including concern that the former CEO Bob Chapek had become wedded to a streaming strategy that did not make sense given today’s reality. With limited experience on the media side of Disney, Mr. Chapek had done an expert job in managing Disney’s parks through the challenges created by the COVID-19 pandemic, but he appeared anchored to the streaming strategy laid out in the December 2020 Investor Day which had created, we felt, unrealistically high subscriber targets without a grasp for the underlying return on investment.”
Nathanson then outlined possible changes under Iger. “We would hope and expect that Mr. Iger examines the investment plans at Disney+ and re-focuses their investment on areas of franchise strength and away from broader general entertainment content,” he wrote. “In other words, Disney+, and Disney’s shareholders, could probably do better with fewer end-state subscribers made up of super fans willing to pay high revenue per user, which would generate much higher margins.”
The MoffettNathanson analyst also said that he has been “worried that the restructuring of the company with a new DMED (Disney Media and Entertainment Distribution) division, has hurt the morale of the creative leadership and has created more bureaucracy, which has slowed decision-making.” Nathanson forecast that Iger will look to give Disney “a renewed focus on letting the creative leaders have the freedom and profit and loss responsibilities that they desire.”
Others on Wall Street also lauded the return of Iger.
“Disney is boldly changing up its CEOs with former leader Bob Iger returning to the seat and replacing the troubled Bob Chapek,” Wells Fargo’s Steven Cahall wrote in a report entitled “What About Bob?” that noted: “While Chapek’s departure is not a surprise due to recent turmoil and the stock’s decline, Iger’s resurgence is a positive surprise.”
He highlighted that investors would see the change at the top as a clear positive. “Iger will be viewed as a catalyst to improve the content aspects of Disney, and we expect bigger potential strategic changes around the long-term shape of DTC (direct-to-consumer),” Cahall wrote. “While the announcement doesn’t solve all of Disney’s problems, we think investors will embrace it as it puts perhaps the best leader in media at the helm with a mandate to shake things up.”
After all, Cahall noted: “Investors are big fans of Bob Iger, in our experience, given his history of leading Disney through major content acquisitions (e.g. Marvel, Pixar, Lucas, 21st Century Fox) and the pivot to streaming (announced in 2017). The Street will see him as a steady leader in uncertain times.”
Iger also returns with much admiration from creatives. “Equally important is that Iger is considered popular among the creative ranks within Disney and Hollywood — an area where Chapek was not embraced,” Cahall emphasized. “Chapek was seen as an ace on park ops, whereas Iger is the content guru, and we think content is believed to be the lifeblood of the company (with streaming potentially garnering the largest enterprise value).”
What lies ahead for Disney under Iger? “Expect some strategic redirection,” the Wells Fargo expert told investors. “Disney doesn’t shake things up without more changes to come. Since the late 2020 investor day, investors have worried that DTC is over-extended between franchise IP, general entertainment and sports. We expect Iger’s first order of business to be a clear plan as to how Disney’s streaming services shape up over time, which could reopen discussion about whether Disney+ is to be a franchise IP content hub or a broader entertainment platform. Hulu’s fate would similarly rest in that balance. We expect to learn more on these fronts in the early days/weeks/months of Iger’s new term.”
With Iger taking over with a two-year commitment, a mandate to “set the strategic direction for renewed growth” and a promise to work with the board to find a long-term successor, Cahall also discussed how the transition from Iger to Chapek had worked out. “In late 2020 and into 2021 Chapek was seen as an early success for stewarding parks through the pandemic and setting new lofty expectations for DTC at the December 2020 investor day,” Cahall wrote. “Since then, much has gone awry on DTC execution, with the share price recently hitting a five-year low (excluding March 2020) after fiscal fourth-quarter 2022 results. We do not believe that Chapek’s exit is a major surprise to investors, though we think Iger’s return is.”
Cahall has an “overweight” rating and $125 price target on Disney’s stock.
PP Foresight analyst Paolo Pescatore in London called the return of Iger as CEO “a huge surprise and completely unexpected.” He also told THR that the change at the top “underlines the state of the streaming landscape and challenges faced by all traditional media companies pivoting towards this new world.”
Pescatore also expects changes ahead for Disney. “The bold move might feel like the right one. However, the business is at a different phase of growth,” he said. “It will take time, and immediate success is not guaranteed. Short-term measures will likely mean a focus on restricting operations and efficiencies.”
Peter Csathy, chairman of advisory firm Creative Media, also shared a positive review of the CEO change, telling THR: “Brilliant move for Disney to return to a stable, trusted hand who now has a chance to calm the markets, boost morale and revisit a transitional move that perplexed many of us at the time.”
Guggenheim analyst Michael Morris wrote in a Monday report that the leadership change “provides clearance to make tough but necessary decisions to realign corporate strategy. We expect all aspects of the company’s media, streaming and parks strategies to be re-examined as Disney navigates a more competitive global marketplace and a meaningfully different financial environment as compared to when Mr. Iger departed in 2020.”
The analyst listed three Chapek “challenges that will likely be examined,” namely the fact that Disney’s 2020 reorganization and alignment change “has not yielded clear process improvements,” the fact that streaming subscriber targets “may not be aligned with a new streaming reality” and “PR missteps – documented conflicts with talent and government officials were at best distractions, at worst impaired the business.”
Morris also identified three Iger opportunities. The first is to “prioritize streaming profit,” he argued. “A more intense focus on Disney branded product and library value, potentially de-emphasizing general entertainment (including divesting rather than investing in Hulu) could be more accretive to shareholders.” Number 2 is maximizing media value, which means that “difficult” decisions about streaming and linear channels must be made. The third: “Delighting consumers first.” Explained Morris: “Risk that parks has hit peak margins in a post-pandemic era could be an underappreciated pitfall for segment trends.”
But at least a couple of Wall Street experts argued that Iger’s comeback also raises some questions. The veteran executive’s “long track record and steady hand at Disney is likely to be welcomed by investors,” argued Barclays analyst Kannan Venkateshwar. “Overall, we believe Mr. Iger’s return is a positive but also needs to be backed up by a more realistic expectations reset, a steadier execution path in streaming and a viable plan to deal with legacy TV challenges. Most importantly, Disney’s board needs to lay out a more concrete plan for management succession to provide more internal and external visibility.”
Meanwhile, Cowen analyst Doug Creutz raised one concern about the return of Iger. “While we expect investors to be pleased with the change, we do not necessarily believe that a lack of leadership is Disney’s problem, and think the change will ultimately make a true transition of power to Iger’s (next) successor even more difficult,” he argued. “The short hook for Chapek and replacement by Iger creates significant instability around the Disney CEO role. Chapek had originally been endorsed by Iger, but some press reports suggested Iger later regretted the decision. We note that Chapek was only chosen after several other talented executives, including Tom Staggs and Jay Rasulo, had left the company after they were passed over for the role. Iger was originally supposed to have retired in 2015; (Sunday’s) action gives at least some appearance that Iger, and not the board, ultimately calls the shots at the company, and that Iger’s willingness to fully surrender power to a successor is low.”
Creutz continued by arguing that “Chapek has largely stayed on a strategic path laid down by Iger that we have viewed as flawed from the outset, and therefore we do not view Iger’s return as necessarily a sign of better times to come.” For example, he argued that the Iger-led acquisition of 21st Century Fox’s entertainment assets “was a significant strategic error” and “an unnecessary divergence from Disney’s core identity of producing high-quality branded family entertainment content.” The launch of Disney+ would have been “just as successful (from a subscriber acquisition standpoint) without the Fox assets,” he added.
“We also think Disney+ was originally underpriced at $7 per month,” Creutz said. “Disney has always been a premium price for premium product company. We think fans of Disney’s content (particularly Marvel and Star Wars) have pretty steep price elasticity curves, and therefore the low pricing unnecessarily started the service off in a deep loss-making hole.”
