Chief executive officer Bob Iger needs more time to bring the magic back to Disney (DIS -0.14%). The entertainment giant, which called Iger out of retirement late last year, has extended his contract by two years. Iger originally was supposed to stay through 2024, then hand over to a successor.
So far, the CEO has announced a reorganization plan, including major cost cuts. But the stock has failed to take off, gaining only about 2% so far this year. Could Iger's longer commitment to the job ensure better results and make the stock a buy? Let's find out.
Image source: Disney.
Leaving before the pandemic
First, a bit of background on the situation. Iger originally was CEO from 2005 through 2020 -- heading out right before the coronavirus pandemic began. Of course, no one knew then what was about to unfold. But the departure didn't happen at the best time. The pandemic resulted in the temporary closure of Disney's parks, and that hurt earnings.
Meanwhile, new CEO Bob Chapek put an emphasis on growing subscribers to the company's streaming services. The efforts worked -- with about 57 million subscribers added in the last fiscal year. But it also resulted in a soaring operating loss at the direct-to-consumer business. Last year, the unit that includes Disney's streaming services posted an operating loss of $4 billion compared to a loss of $1.6 billion a year earlier.
Disney brought Iger back late last year to get a handle on ballooning costs and set the company on the path to growth. During Iger's original tenure, earnings and share price both climbed. So, it's reasonable to believe he's the right person for the job today.
Iger earlier this year outlined a plan targeting $5.5 billion in cost savings. The efforts include job cuts, and savings on content spend and marketing. Iger also made organizational changes to favor creativity. The idea is to offer those creating content the opportunity to make decisions -- and take responsibility for that content's performance.
A possible strategic partner for ESPN
In an interview with CNBC this week, Iger revealed additional possibilities to cut costs and boost growth. He said the company is looking for a strategic partner for ESPN. He also spoke of the possibility of selling or spinning off the company's legacy cable networks and ABC Networks. Finally, Iger said the company would cut back on making more Marvel and Star Wars content.
Meanwhile, part of Iger's job includes finding someone to take over the position when he's reached the end of his term. Considering this broad to-do list, it's not surprising Disney's board has extended Iger's contract for two more years.
"Bob has once again set Disney on the right strategic path for ongoing value creation, and to ensure the successful completion of this transformation while also allowing ample time to position a new CEO for long-term success, the board determined it is in the best interest of shareholders to extend his tenure," Disney chairman Mark G. Parker wrote in the announcement.
But does all of this make Disney a buy? It's true that Disney's rising costs have put the brakes on growth in recent times. And today's high interest rates could weigh on earnings in the near term. Extra pressure on consumers' wallets mean they may cut back on a trip to Disney or discretionary purchases -- such as Disney merchandise.
Temporary troubles
So, right now, Iger's cost-cutting efforts may work. But efforts to spur growth may take more time to bear fruit. At the same time, Disney shares are trading for only about 23 times forward earnings estimates. And today's economic troubles are likely temporary -- so they may hurt earnings in the near term, but Iger's efforts could pay off over the long term.
And there, I said the key words: "long term." It's important to look at Disney through a long-term lens. From this perspective, the stock is a steal right now.
Investors are getting in at a reasonable price considering certain points: Disney's parks business continues to grow in the double digits, even in a difficult environment. Iger is putting the focus on Disney's strength of creativity and working to cut the elements that have weighed down earnings and the stock. And the company offered Iger more time -- which could be crucial to ensure success.
All of this means that right now, with Iger at the helm for a couple of years more, is a great time to get in on the Disney story.
