Shares of Walt Disney (DIS 0.20%) struggled in 2022, but the company is bringing out the big guns, recently announcing the return of beloved CEO Bob Iger to lead the company. It's almost the end of the year, so shareholders might be celebrating the new year with Iger back at the helm. After all, Iger was essential in building Disney into the entertainment titan it is today.
But not everything is as rosy as a day in Disneyland. The company has some fundamental flaws, and Iger's return leaves some critical issues unaddressed. Below I'll discuss what all of this means for the stock in 2023, which might not be the victorious scenario that Iger has created in the past.
There are some things Iger's return can't fix in 2023
Iger has been immensely successful as CEO of Disney, pulling off blockbuster acquisitions of properties like Marvel and Star Wars and building Disney+. Still, his return won't be like hitting the easy button and watching all of Disney's problems disappear. The company has some financial baggage that goes back to the massive merger with Fox a few years back.
Disney's balance sheet still carries $48 billion in long-term debt, much of that from the Fox deal. That puts the company's leverage at a ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) of 4.3, which is higher than one might like. I often look for a ratio under 3. Disney has $11.6 billion in cash on hand, which removes some pressure from the financials. But the enormous debt load has prevented share repurchases and dividend payments -- something shareholders used to enjoy.
DIS Cash and Short Term Investments (Quarterly) data by YCharts
Management probably hoped to pay down the company's debt sooner, but the company has struggled to generate cash since the pandemic. You can see below that free cash flow is nowhere near pre-pandemic levels, and $1 billion in cash flow doesn't help much when your debt load is $48 billion. Disney+ still loses money, and operating income in Disney's media segment totaled just $4.2 billion in 2022 -- down 42% from the prior year.
DIS Free Cash Flow data by YCharts
Iger's return could move the needle in getting Disney's business back on track and improving how much cash the company puts out. However, Disney's in quite a big hole, and Iger alone probably won't change the company's balance sheet overnight. Disney+ likely won't turn profitable until 2024, so investors should set the proper expectations -- this could take some time.
Kicking the CEO can down the road
Shareholders are excited by Iger's return; the stock responded well when the news broke. But every coin has two sides, and the flip side of Iger's return is Disney's failure to find adequate leadership for the long term. Former CEO Bob Chapek's short tenure was a failure, and Iger's return for two years sets a new clock. Iger should be able to help steady the ship while he's there, but the financial picture above shows that it will probably be someone else laying the foundation for the company's future.
Management is essential to a company's long-term growth and success, so Disney isn't out of the woods yet. Investors should keep an eye on who eventually gets tapped to lead Disney after Iger, and it will take a few years to know whether they are the right person for the job.
Disney's one of the most well-known companies on Earth, but the business still faces more questions than potentially any point in recent memory. Robust brand power and a thriving Disney+ point to the company figuring things out eventually, but Disney's short-term challenges could make it a disappointing stock in 2023.
