Goldman Sachs co-led The Walt Disney Company's (NYSE: DIS) initial public offering in 1957, when the entertainment giant landed on the New York Stock Exchange at $13.88 per share. Disney's stock has increased by nearly 5,000% since then as it attracted hundreds of millions of people to the box office and its theme parks.
The House of Mouse is arguably the most successful entertainment company in history, and its stock price growth has made many people richer. However, Disney hasn't had it easy over the last five years -- in fact, the headwinds it faces might have some experts convinced the company has reached its peak. Since 2019, the company has faced a global pandemic that temporarily shuttered major areas of its business. Then, it had to navigate the subsequent economic uncertainty. Meanwhile, it has made an expensive venture into streaming in a bid to keep up with the entertainment industry trend.
Disney's share price is down by 30% over the last five years, and Wall Street has grown skeptical about the company's future. Yet despite the pullback, Disney's earnings have remained consistent. Quarterly revenue and operating income have risen by 21% and 47%, respectively, since 2019, with free cash flow up 360%.
The company has proven its long-term reliability. Meanwhile, its recently reported fiscal third-quarter results indicate its business is on a promising growth trajectory.
Formulating a solid succession plan after recent issues
After the difficulties of the pandemic, Disney parted ways with then-CEO Bob Chapek and brought back Disney veteran Bob Iger to help it navigate tricky market conditions. Iger first became CEO in 2005 and oversaw some of the company's most profitable ventures. He negotiated crucial acquisitions like Pixar in 2006, Marvel in 2009, and Lucasfilm in 2012. Meanwhile, he expanded Disney's theme parks division by opening Shanghai Disneyland in 2016, exposing the company to a critical growth market.
Bob Iger began a transition period and ceded his position to Bob Chapek in 2020, officially retiring in 2021. However, the retirement proved to be short-lived. Chapek's handling of the events of the pandemic shook the board's confidence in him. He was ousted in 2022, and Iger was reinstated with an extended contract set to expire in 2026.
These leadership shuffles have made succession a hot topic among Disney investors. The recent news that the company has named James Gorman, former CEO of Morgan Stanley, to lead its succession committee is a reason for optimism about Disney's long-term future.
Gorman previously oversaw Morgan Stanley's succession and will help Disney implement a more formal passing of the torch, which will include creating a thoroughly vetted committee. Gorman will chair a team consisting of Disney Chairman Mark Parker (who has a similar role at Nike), CEO of General Motors Marry Barra, and Lululemon Athletica CEO Calvin McDonald.
Once chosen, the next CEO's preparation process will involve mentorship from Iger, coaching from outside of Disney, and guidance from all board members.
The thorough operation and Gorman's appointment were announced just weeks after the company posted positive quarterly results that indicate that strong leadership could take Disney far over the next decade.
Disney's commitment to streaming is paying off
The Walt Disney Company announced its third-quarter results on Aug. 7. Revenue increased by 3.7% year over year to $23.16 billion, beating analysts' expectations by $70 million. Meanwhile, segment operating income popped 19%, driven mainly by stellar gains in its entertainment division.
The quarter also saw Disney achieve an exciting milestone -- its streaming business reached profitability for the first time, and a quarter earlier than projected. That unit, which includes Disney+, Hulu, and ESPN+, delivered operating profits of $47 million; in the year-ago period, it reported losses of $512 million.
The win in streaming comes after a glowing summer for the company that saw it become the only studio so far in 2024 to have movies that crossed $1 billion at the box office. And Disney hit the milestone twice, with Inside Out 2 released in June and Deadpool & Wolverine in July.
Disney has an exciting outlook as it makes moves to promote a successful succession and its entertainment division delivers impressive growth. The company has some work to do in its parks division, which saw a slowdown in demand in Q3. However, an improving economy could gradually boost the business as consumer spending power strengthens.
Data by YCharts.
Disney's stock is trading at some of its cheapest valuations in years. The entertainment giant's price-to-earnings (P/E) and price-to-sales (P/S) ratios are significantly below their 3-year averages. As a result, now could be an excellent time to make a long-term investment in Disney stock at a bargain level.
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Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica, Nike, and Walt Disney. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
