Dan Loeb, Chief Executive Officer and Chief Investment Officer of Third Point LLC, disclosed a roughly $1 billion stake in The Walt Disney Company (NYSE:DIS) in August 2022. Loeb became an activist investor seeking changes to arrest the company’s share price decline. On September 30, 2022, he succeeded in adding an independent member to Disney’s board of directors, Carolyn Everson. In response, Loeb signed a support agreement with Disney through 2024.
In the weeks following Everson’s appointment, Disney reported disappointing Q4 2022 results and guidance and saw its share price plunge to levels first reached in 2014. Within twelve days of the disappointing results, on November 20, 2022, the board of directors fired the company’s CEO, Bob Chapek. The speed with which the board acted to remove Chapek is a testament to the advanced stage of change within Disney which the Loeb activism signified.
Bob Iger was reinstated in the top position. He served as the CEO from 2005 until Chapek’s appointment in February 2020. As a result, it is an excellent time to review the Disney investment case. This update builds on my November 16, 2021 report, “Disney battles to retain the content king crown,” which opened with the following:
I am assigning The Walt Disney Company (NYSE:DIS) a negative risk/reward rating based on its heightened risk of persistently lower profitability, intensifying competitive pressures, a rapid slowdown in streaming subscribers, and an elevated valuation.
Since the November 2021 report, shares of Disney have returned -41.75% compared to -16.22% for the S&P 500 index. The extraordinary underperformance of Disney over the past year has corrected a material amount of the elevated valuation risk at the time of the last report. While the price correction is welcome from a prospective investor viewpoint, the risks detailed above are materializing.
The key question today is whether the risk/reward asymmetry remains to the downside, is now neutral, or has it shifted to the upside given the extreme underperformance?
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