Disney board showdown nears end, stock up 35% for the year

FILE - The Cinderella Castle is seen at the Magic Kingdom at Walt Disney World, July 14, 2023, in Lake Buena Vista, Fla. Allies of Florida Gov. Ron DeSantis and Disney reached a settlement agreement Wednesday, March 27, 2024, in a lawsuit over who controls Walt Disney World's governing district.(AP Photo/John Raoux, File)
FILE - The Cinderella Castle is seen at the Magic Kingdom at Walt Disney World, July 14, 2023, in Lake Buena Vista, Fla. Allies of Florida Gov. Ron DeSantis and Disney reached a settlement agreement Wednesday, March 27, 2024, in a lawsuit over who controls Walt Disney World's governing district.(AP Photo/John Raoux, File)

As Walt Disney Co. looks set to conclude a showdown over the composition of its board, bulls have sent the stock soaring.

The shares have rallied 35% this year, more than triple the gain of the S&P 500 Index. Buoyed by better-than-expected earnings, a new strategy for ESPN and Hulu and cost-saving job cuts, the stock has outperformed the 26% rise of streaming rival Netflix Inc. in that time.

"The market is starting to realize that there is a lot of value in Disney that hasn't been realized," said Ross Gerber, president and co-founder of Gerber Kawasaki Inc. "Disney is a cheap stock compared to other entertainment companies, and people are starting to recognize that."

Today's shareholder meeting provides the latest test for Chief Executive Officer Bob Iger, who returned to the helm in November 2022. Disney was reported by The Wall Street Journal to be leading in its proxy battle against billionaire activist investor Nelson Peltz's Trian Fund Management LP with more than half of the votes counted.

Trian is pushing for changes to management and strategy at Disney in an effort to improve what it sees as years of poor performance. As well as Peltz, Trian is seeking a seat for Jay Rasulo, a former finance chief at Disney. Peltz has received the backing of an influential shareholder advisory firm and a group of business leaders in his bid to join the board.

One of Peltz's main contentions with Disney has been how the company has handled succession. Iger returned to lead Disney in 2022, replacing Bob Chapek, who had been appointed as his successor.

While Iger's return and the upheaval he has overseen have instilled confidence, that might not extend to the board, which will again have a say in selecting his replacement, according to Hanna Howard, a portfolio manager at Gabelli Funds. "They don't have the strongest track record at this point of choosing someone to succeed Iger and navigate this complex business," she said.

For now, Wall Street is focusing on Disney's improved performance, particularly in terms of free cash flow, park operating income growth and a streaming business that's close to profitability.

Disney's multiple of 24 times forward earnings is cheaper than that of Netflix at 36 times. This year's stock performance marks a turnaround after Disney lagged the broader market with a meager gain in 2023, after back-to-back annual declines. Still, the stock is about 40% below a 2021 all-time high.

Analysts at UBS, Bank of America and Raymond James have recently raised price targets. Barclays upgraded the stock to overweight from equal-weight.

"The Disney board will probably refocus attention on CEO transition and if Mr. Iger does indeed intend to retire in 2026, as presently planned, we wouldn't be surprised if the company also lays out a long-term plan and guidance ahead of his departure which could further help the stock," Barclays analysts led by Kannan Venkateshwar wrote in a March 25 note upgrading Disney.

The upcoming earnings season may also provide further upside for shares, with Disney expected to report May 10.

"Since returning as CEO in Nov '22, Bob Iger now appears to be in command and control and on a growth offensive," wrote Bank of America analysts led by Jessica Reif Ehrlich in an April 1 note, raising the price target to $145 from $130. "Having spent the past year restructuring the company, he is now focused on multiple bullish drivers."

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