Disney Stock is bound by a sea of ​​problems with the CEO’s resignation

<p>Walt Disney (NYSE: DIS) CEO Bob Iger resigned surprised shareholders.

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But it was a bigger surprise on the revenue call. That was the name of Bob Chapek, head of the parking unit, as Iger’s successor.

Iger, 69, had promised to continue after his retirement in 2017 to handle the acquisition of Fox’s programming assets. But his promise was only kept until the end of 2019.

The hard work of integrating what he built now goes to Chapek, who ran the consumer products unit before he started parking in 2015. In 2019, parks and resorts became the largest unit in Disney with more than 35% of total revenue. But media networks, including ESPN and ABC Television, were the biggest profit center.

A sea of ​​problems

Chapek enters the hot seat with Disney in the face of a host of problems.

These start with the parks, where revenues only increased by 6% last year. Coronavirus from China is expected to hit that deal hard. The company’s attractions in China are already closed and the others may be closed when the virus spreads. And the cherry on top? The company also operates a cruise line.

Chapek oversaw the largest expansion of parks in Disney’s history, doubling the size of the cruise line. There may be little he can do to contain virus damage in the short term.

There are bigger problems.

The company’s renowned direct-to-consumer companies, which include Hulu, ESPN + and Disney +, lost $ 1.8 billion in the past fiscal year. Disney has brought together the three networks to gain market share of $ 12.99 per month. This is the same price that Netflix (NASDAQ: NFLX) charges on its standard plan.

With the acquisition of the Fox Studios, now dubbed the 20th Century, Disney owns 40% of the US box office. It sounds good, but the whole business is disrupted by streaming. Tent pole films from Disney’s Marvel Studios, Pixar and Star Wars lines may be less important in the future.

Decisions on how to proceed must be made now in 2021.

An expensive stock

Iger’s promises of future glory prompted investors to pile into Disney before his departure.

The stock market reached a peak of over 260 billion dollars in November last year. Disney opened for trading on February 26 at about $ 125 per share, a market value of $ 230 billion. The subsequent price / earnings ratio remains high at 21X. Meanwhile, the return is low at 1.32%.

Disney had $ 38 billion in debt at the end of September, with the cash balance down to $ 5.4 billion. After winning World War II on entertainment, Disney now looks as vulnerable to a virus as HG Wells Martians.

Chapek may prove to be an inspired choice. He is an expert in revenue generation. Iger said he will remain CEO until 2021 to work on the company’s creative strategy. It leaves Chapek with the task of extracting profits.

Most analysts stayed in the Disney corner when Iger made its announcement, with an average price target of $ 164.19 – 28% higher than current prices. Expect these price targets to decrease when the cost of the virus becomes clear. Following the announcement, Sanford Bernstein offered a $ 141 Disney price target and rated it on the market.

The conclusion of Disney Stock

Disney’s short-term future depends a lot on how bad the corona virus gets. Chapek’s great success may be an albatross that depends on the 2020 results.

Analysts believe that Disney’s streaming business could be worth more than $ 100 billion, and with 26.5 million subscribers, it looks robust. However, the launch is aided by bundling. Chapek is facing choices in terms of division and price increases that could slow growth.

Netflix currently has 150 million subscribers, of which 61 million are in the United States. About 82% of American households have an Amazon membership (NASDAQ: AMZN). The alphabet’s (NASDAQ: GOOG, NASDAQ: GOOGL) YouTube dominates the free end of the market. Against Cloud Czars, Disney is financially outgunned.

The old Chinese curse, “may you live in interesting times”, applies to Bob Chapek.

Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, today and tomorrow with Moore’s team, essays on technology available in the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. At the time of writing, he owned shares in AMZN.