Chance to buy after activist nets $1bn profit on stake sale
A decline in price following a large share sale presents an opportunity at this famous company. Overseas investing expert Rodney Hobson explains why.
5th June 2024 08:22
by Rodney Hobson from interactive investor
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Having an activist investor on your back is a double-edged sword for company directors. The outside agitator keeps the board on its toes but is also a serious distraction and they may not have the wider interests of other shareholders at heart. Getting rid allows the executives to get on with the job they are paid to do but also removes the incentive to do better.
Nelson Peltz, a billionaire activist shareholder, has sold the entire $3.5 billion stake in entertainment group Walt Disney Co (NYSE:DIS) that he held through his Trian fund, after failing to convince other shareholders to vote two of his representatives on to the Disney board. He does have the consolation of making a $1 billion profit on his adventure.
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Peltz argued that Disney had “woefully underperformed its peers and its potential” and latest quarterly results, for Disney’s second quarter to the end of March, were indeed a mixed bag, though there were certainly more positives than negatives from an empire covering Hollywood studios, theme parks and television subscription services.
Revenue edged up just 1.2% to $22.1 billion but restructuring and impairment charges knocked a $2 billion hole in net income, which was down 85% to $216 million. That was a real pity, because otherwise the figure would have jumped from $1.5 billion to a highly creditable $2.2 billion.
The culprit was the setting up of a joint venture combining Disney’s Star India arm with the Indian operations of Reliance Industries. Without those one-off changes, earnings per share (EPS) were up 30%.
Meanwhile, the experiences division, which includes theme parks and resorts, performed strongly while the streaming business of Disney+ and Hulu at last produced an operating profit for the first time.
The Hollywood studio has produced a series of cinema box office flops, prompting Disney chief executive Bob Iger to intervene to demand fewer films but of higher quality. He has already got to work on animation studio Pixar, which is shedding 175 jobs, about 14% of its staff, to reduce costs as it returns to focusing on feature films.
The better results from theme parks, plus confidence that the video streaming service will be profitable in the final quarter to September, have prompted Disney to raise its annual guidance from a 20% rise in earnings per share to a 25% uplift from $3.76 achieved last time. Given that underlying EPS was 30% higher in the second quarter, the new target looks highly achievable.
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That still leaves the issue of a succession plan, which was a key plank of the failed coup by Peltz. Iger was reinstated after his chosen successor Bob Chapek was ousted. Iger has promised to serve for two years at the most, more than adequate time to find a competent replacement.
Disney shares looked to be heading north of $200 just over three years ago but problems of making the streaming service profitable in the face of intense competition and a strike by screen writers and actors has taken the shine off the stock. The bottom of the market came at $80 last October, since when the shares have been as high as $122.
Source: interactive investor. Past performance is not a guide to future performance.
A recent pullback to around $103, caused mainly by Peltz dumping his holding, has opened up a buying opportunity, although the price/earnings ratio in triple figures is more than a little daunting. The yield is also miserly at just 0.3%. Clearly a massive improvement, as promised, is factored into the share price.
Hobson’s choice: I recommended Disney as a buy, with some caveats, at just below $120. Now the shares have slipped back I rate them as a buy with rather more confidence, especially as the rest of this year looks far more promising.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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