walt disneyNew York Stock Exchange: DIS) stock has been a colossal disappointment for investors In the last five years, going virtually nowhere in the span of time. It’s been such a brutal job for Disney stock that activist investor Nelson Peltz has gotten involved in an attempt to unlock the magic.
With a proxy battle between Peltz and the company, Disney becomes a very interesting turnaround play for investors willing to take another look at the battered media gem. I for one am optimistic and believe that Peltz could be what the doctor ordered despite the backlash from the company.
With Bob Iger taking over from Bob Chapek as CEO, the company may already have the tools it needs to break out of its impasse. Still, Iger doesn’t exactly have a stellar track record, given that Disney’s stock woes began long before Chapek took the reins during the most uncertain part of the pandemic.
Activist Nelson Peltz points
Activist participation is not a guarantee of imminent change. In some circumstances, such participation may delay progress. Disney went so far as to say that Nelson Peltz “lacks the skills and experience” to help the company as it continues to afloat. Investors will certainly have a chance to weigh in. Still, in the meantime, recent action in the stock suggests that a board shakeup might be the best way to combat what Peltz calls a “crisis.”
In fact, a crisis may be overkill to some, but for Disney shareholders who bought at or near the peak, Disney has been an investment nightmare, with shares falling more than 55% from the peak. to the lowest point. The company has had plenty of time to get over the worst of the pandemic, and its messy succession planning has also been hard to ignore, with Iger coming out of retirement to stop a stock plunge.
In any case, I see Peltz as a man throwing a lifeboat to shareholders by seeking to secure a board seat for his company, Trian Capital Management, rather than someone who could further complicate matters.
Disney already has a lot going on behind the scenes, and with heavy losses racking up on the Disney+ platform, a fresh set of eyes may be just what the House of Mouse needs to return to dominance in the modern age.
Disney shares: difficult to value amid deep uncertainty
Disney stock price-earnings (P/E) ratio of 63 times it is historically stretched. Yes, there are headwinds, but overspending on streaming isn’t doing the company any favors as the industry falls to its knees. Despite the high P/E, DIS shares look much cheaper based on price-to-sell (P/S) and price-to-book (P/B) ratios. Sales of 2.4 times and book multiples of 2.0 times are well below the broadcast industry average of 5.3 and 2.1 times, respectively.
Given the violent plunge that streaming stocks have suffered over the past year, it’s hard to gauge how much investors should pay for streaming exposure. Streaming has become a tough game to play, and management under Iger needs to make moves to get the company back on track in this era of high fees.
In fact, Iger needs to stay focused as Peltz and Trian look to show some board members to the door. I think it’s hard to argue that Disney has faded due to poor management moves. The purchase of 20th Century Fox seemed ill-timed, as had the acquisition of ESPN many years before. Simply put, Disney has had plenty of opportunities to prove itself to investors.
Peltz seeks to “restore the magic” at Disney
Peltz noted several goals to help “restore the magic” (according to Trian’s RestoretheMagic.com site outlining the company’s problems and proposed solutions) at the company. The first goal is to find a suitable top boss to eventually replace Iger within two years. Indeed, Disney has struggled with succession planning, and such a move with a reasonable window of time could help Disney put things in order without the pressure that an immediate CEO replacement would have caused.
Reducing CEO pay is another goal that I’m sure many shareholders can get behind. While higher compensation may be justified by performance, Disney has been anything but outperforming lately. It has been one of the Dow Jones’ (DJIA) the biggest laggards.
Furthermore, Peltz wants to transform Disney+ into a “niche” platform. In fact, such a move represents a big change and could carry considerable risks. Disney+ may be a prime target for cancellation in such a change.
Are DIS shares a buy, according to analysts?
Going back to Wall Street, DIS shares appear to be a strong buy. Of the 24 analyst ratings, there are 20 buy recommendations and four hold recommendations. He Disney average price target is $119.75, implying upside potential of 9.5%. Analyst price targets range from a low of $94.00 per share to a high of $177.00 per share.
The Takeaway: It’s Going to Be a Wild Ride
Peltz’s move into stocks could help, but investors should continue to expect a lot of volatility (DIS stock has a beta of 1.23, making stocks choppier than the market) in the coming months.
Ultimately, Disney needs to make a drastic change, with or without Peltz’s help, but I think Peltz is a much-needed catalyst to help restore the magic to Disney’s stock.
