Walt Disney (NYSE:DIS) stock rallied over 23% in 2014, handily outperforming the S&P 500's 11.4% gain. The House of Mouse rose on robust attendance at its theme parks, solid box office performance from Frozen and its Marvel films, and dependable returns from its media networks.
Looking ahead, Disney could outperform the market again in 2015, thanks to new Marvel and Star Wars releases and the grand opening of the Shanghai Disney Resort. Despite these strengths, there's one thing that many Disney shareholders, including myself, worry about -- the eventual retirement of 63 year old CEO, Bob Iger.
Bob Iger's legacy
Bob Iger, who succeeded Michael Eisner as CEO in 2005, took over during a tumultuous time at Disney. The previous five years had been unpleasant ones marked by a hostile takeover attempt, a shareholder revolt, and internal conflicts within the board.
Iger, a former chairman at ABC (which Disney acquired in 2005), established an inorganic growth plan to turn Disney into a media superpower. In 2006, Disney acquired Pixar for $7.4 billion, putting Pixar chief creative officer John Lasseter in charge of Disney's in-house animation studio. In 2009, Disney acquired Marvel for $4 billion, which led to the expansion of the Marvel Cinematic Universe in film and on TV. In 2012, Disney spent another $4 billion to buy Lucasfilm and the rights to future Star Wars films.
Those acquisitions reestablished Disney as a top player in the industry, but it was Iger's skill at expanding these franchises across multiple business segments that improved Disney's overall financial performance. Marvel, Disney, and Pixar films quickly complemented ABC TV shows, and vice versa. Marvel, Pixar, and other animated characters appeared in Infinity, Disney's "virtual toy box," which boosted sales at its Interactive division. Selling and licensing out toys and merchandise for these intellectual properties also lifted revenue at its Consumer Goods segment.
Under Iger, Disney's revenues and profits hit record highs for three consecutive years. Films during his tenure generated the highest box office revenue in the company's history as theme parks in California, Florida, Tokyo, and Hong Kong also posted record attendance. As a result, Disney's stock price has soared nearly 300% since Iger replaced Eisner.
What will happen after Iger retires?
Last October, Disney extended Iger's contract to 2018, two years later than his previously announced retirement date. Disney previously extended his contract from March 2015 to June 2016.
CFO Jay Rasulo and Thomas Staggs, the parks and resorts chairman, are frequently mentioned as the two top candidates to replace Iger. However, neither Rasulo nor Staggs rose through the ranks of a major media company, as Iger did at ABC.
If Disney's next CEO fails to replicate Iger's strategy of running the company as a sum of its parts, the maximum profitability of its top franchises might not be realized. We already see that problem at Time Warner -- HBO's Game of Thrones, Warner's The Hobbit and DC comic book films, and TV shows based DC characters on the CW (a joint venture between Time Warner and CBS) are all isolated in disconnected "fiefdoms."
If Iger ran Time Warner, it would not be surprising to see a Game of Thrones spin-off movie, a Hobbit spin-off series for HBO, or a more cohesive DC Cinematic Universe connecting the films to the TV shows and the characters to each other.
Other potential challenges
As a Disney investor, Bob Iger's upcoming retirement is one of the only things that would convince me to reevaluate my position. However, that doesn't mean Disney stock will be bulletproof over the next three years.
A slowdown in consumer spending could reduce attendance at its theme parks, ad spending on its TV networks, and box office revenue. Stronger competition from Fox Sports could hurt ESPN's ratings, while ABC could keep lagging behind CBS and Comcast's NBC in network ratings.
Meanwhile, Marvel Studios president, Kevin Feige, must keep the Marvel Cinematic Universe on track as it focuses on feature films for lesser-known characters. The animation studio must also keep pumping out blockbuster films like Frozen while avoiding flops like Mars Needs Moms.
The road ahead
For now, I'm still convinced Disney stock could easily top $100 per share this year, so investors shouldn't worry about Iger's imminent retirement just yet. But Disney still fails Warren Buffett's classic "ham sandwich as a CEO" test, since its continued success is highly dependent on the ability of Iger's successor to maximize the growth potential of top media franchises across the entire business.