Welcome back everyone. We have some breaking news
Disney stock as we know has not been doing well over the past
year and a half. It has not been magical.
The company stock price is down 49 percent from its all time
high and even over a longer time periods, the 5 years to 10 years
Disney is basically flat, its underperformed, the S&P 500 by a
huge margin and for a lot of investors, this has been
perplexing because Disney's one of the it's one of the
strongest. Remote most unique dominant
consumer brands in the world and it's been underperforming it
spares. It's been underperforming the
market. It's been doing terrible.
I own Disney stock, I've owned it in my dividend growth
portfolio and it doesn't even pay a dividend anymore.
It has been my single worst holding the single worst
performing one in that entire portfolio, but dizzy investors
may have a rescuer here. His name is Nelson Peltz and he
is a billionaire activist investor.
Now Nelson like lat. Other investors doesn't like
what he sees going on with Disney.
He actually wrote a very critical presentation.
This slide deck called Disney restoring the Magic by tree and
partners who is Nelson. Peltz has firm.
This goes through, and just details all the things that
Disney's done, their massive compensation packages for
executives, paying themselves. Hundreds of millions of dollars,
that isn't linked to performance.
They're bad Acquisitions. Overpaying for the fox deal,
they're bloated. A structure costs going up
faster than the rate of Revenue. He's highlighting a lot of
problems in the slide deck that we're going to look at.
And he believes that he can be the solution.
He thinks he can turn this company around and he has a long
history of doing just that he's been an activist investor and a
lot of other consumer Brands companies like Disney and he's
been able to get the company in shape and back on track, and he
has a very good track record, very good at turning these type
of companies around. So we're going to go through
this slide deck and it is a detailed.
Assessment of Disney, this is the single best piece of
research. I've seen on Disney in the past
year, it gives a clear illustration of everything
that's gone wrong with the company and what he thinks he
can do to help fix this. So we're going to be going
through that and just for the record before we even get into
it, I am firmly on Nelson. Peltz aside.
I think you should get a board seat.
I think you should be involved in Disney and right away.
Disney does not like this Disney doesn't want any changes.
Disney Executives said on Wednesday afternoon in a
statement. Moment that they're opposed to
having him join the board seat. They only want him to have one
seat. They don't want him to be
involved in the company at all. Why wouldn't they want him to
join? The board of the company will?
Obviously right now, everything's working out.
Well, for the Insiders of the company.
Executives are getting paid. Employees are getting paid.
It's the shareholders that are being hurt.
So having said that, let's go ahead and jump into this.
This is going to be a good one. I think this one is going to be
chock-full of information. And if you're looking at
potentially investing in Disney, I think this is a good.
Point. Because this really does frame
where the company is and what direction it could possibly go.
Now before we get into the slide deck presentation, I first want
to go to a interview clip with Nelson Peltz.
This is just today and you can kind of meet them and get to
know who's fighting on your behalf as a Disney shareholder
and I truly truly believe that is the case.
There's some investors, some activist investors that are
really short-term focused the more like vultures where they
come in, and they just want a quick price, pump in a stock and
then they're out now. Nelson Peltz is not that type of
person. He has a very long-term
orientation, he is focused on a five, six, seven year, period
with a company and he has the history to prove that.
So I don't view this guy as a vulture.
I don't view him as a bad investor.
I think he is on behalf of investors.
Trying to do something positive for Disney, he's trying to hold
them accountable. So let's first go ahead and play
this clip where he explains why he picked his knee changing a
quote from a famous movie with my first question of all the
companies and All the industries and all the world.
You got to walk into Disney. Why?
Why Disney? And why you David?
Good morning and good morning, Jim.
Why not? We have skin in the game, you
know, we looked at a company and we look at Disney and we say
that this is the most Advantage consumer company on the planet.
And we love it. That's the reason why we're
here. However, the TSR the total
shareholder return of one, three five, ten years has materially
underperformed, the S&P that right there is a good enough
reason for an activist investor to get involved.
When you have a company like Disney with the brand value,
with the franchise, with the moat that Disney has.
Everybody agrees that Disney has a wide moat with their parks and
they underperform the index and the one-year, the three-year the
five year and the tenure it's time for someone to step in and
just go what's going on here, you're not doing well for
shareholders. There's companies that are much,
they're not as impressive of companies, we got companies like
Dollar General. Feeding Disney to Pieces.
So we have this this wide moat company, with IP with all these
unique assets, just getting crushed by the market.
Let's go ahead and go through this presentation here.
Disney is the most Advantage consumer company in the world.
It has unrivaled global scale Irreplaceable Brands, inimitable
parks and can leverage the Disney flywheel to monetize its
intellectual property for these reasons we believe the company
is, well, positioned to succeed. I agree with this.
This is the initial thesis of Disney.
However, Disney's recent share price and operating performance
have been disappointing. Total shareholder returns has
materially underperformed, the S&P 500 and proxy pairs over the
one-year three-year five-year and ten year periods.
Disney Shares are currently trading at an eight-year.
Low operating performance has deteriorated including 50%
Decline and adjusted EPS from Financial 2018.
We believe the current investor sentiment on Disney is at an
all-time low. I would agree with that
reflecting the Truth that Disney is a company in crisis and faces
many challenges that way on the company's investment prospects.
While we acknowledge that Disney, like many media
companies is undergoing challenges pivoting to
streaming. We believe that many of the
company's current problems are self-inflicted and need to be
addressed. This is true as well.
Disney will try to say we're just in a transitional period.
We're going to streaming and they're trying to do that to
mask all the self-inflicted wounds, they've given
themselves. There's lots of companies
transitioning, the streaming Disney has made Some huge
blunders to make this much much worse than it needs to be tree
and believes that it is, well, positioned to facilitate
positive changes at Disney, given our experience investing
in and serving on the board of directors of Blue, Chip
companies and working collaboratively with management
teams and boards to optimize corporate governance strategy
operations and capital allocation.
They say that they realize Disney's undergoing a lot of
changes quickly and they're not trying to create additional
instability by replacing Bob Iger.
So way that Disney will try to defend, this is say that Nelson
Peltz is coming in and he's causing more havoc and chaos and
investors should be worried. This activist investors coming
into even screw things up, that's what they'll try to do.
That will be Disney's defense. Here this is just causing more
of a Ruckus and more problems. Not the case.
What he's asking for is very reasonable and he has a history
to show that he doesn't cause a stir, he doesn't screw up
companies by coming in and leaving them.
Disney's trading at an eight-year low, we can look at
this price Performance chart it's just miserable.
This is a completely miserable price performance chart the same
price since 2000 15 2015, 8 years from now and even so it's
not like investors are happy to buy the dip.
Most of them are incredibly discouraged.
So we're at an eight-year low and it doesn't feel the same as
some other companies that are are dipping down.
This isn't like Google or Microsoft Azure Amazon, that's
dipping. This is where investors are very
discouraged with Disney. So we have some problems.
Mom's here. Now the next two pages.
I'm not going to go over all of them.
It's basically Tree on trying to present that they are not
vulture capitalists. They don't come in and try to do
quick bumps and stock prices that are at the long-term
detriment of the company, what they've proven throughout their
track record is they hold companies on average for six
years, the average retail investor holds a company for
five months. So they are very long-term
oriented and their performance while holding companies that
they're actively involved in is very good Market beating by nine
hundred basis points per year. So they have a huge long track
record of outperformance with their activist investors from
the data. There is nothing I can find of
why Disney has any reasonable excuse to not allow them to have
a board member. It just doesn't make sense.
The only reason I could see why is for selfish reasons from
Disney that they don't want to have accountability that they
don't want anyone. Telling them what to do.
Even if it is a big shareholder of the company, Disney
consistently underperforms Disney's tenure performance
here. It's given a total return of 107
percent. The S&P 500 has given you twice
as much and then companies proxy pairs.
I'm not sure what these are but out assume like Comcast other.
Other media companies have given a total return, a four hundred
seventy eight percent. So even relative performance to
their industry, they can't use that excuse.
Either, and these are the pairs that Disney picks.
Not that tree mpix, not that Nelson Peltz.
These Are Disney's pairs that they pick as their Pairs and
their underperforming them widely.
We look at the five year, they're down 10% on the
five-year. The company's peers are up, 26%
in the S&P, 500 is up 56%. And then this, this just goes on
every time frame the three are the same thing.
They're down 34 percent 25 percent below their pairs.
And sixty percent below, the S&P 500.
On the one year, they are down 39 percent in the past year.
So zooming in zooming out doesn't matter which way you
slice it. Disney is underperforming
persistently. Disney's financial performance
has been disappointing. This is a case where it's not
just the stock that's underperforming.
It's not just multiple compression.
The company's operating performance has been incredibly
poor. The only thing that they're
really growing is revenue. So we have Revenue growth here.
That's great. But again, Revenue growth isn't
profitability, 24 billion dollars Revenue.
Increased driven by the 21st Century Fox deal.
So this is done by Acquisitions, it's easy to buy Revenue.
Companies can do something called buying Revenue, where
they just buy more companies that grows the revenue but they
have to dilute the shareholder to do that.
So even though it looks good on paper because revenues going up,
they diluted you, you don't own as much of that Revenue.
So this 41 percent Revenue gain for buying Fox is this was done
by a lot of dilution in a ton of debt.
Now they have interest payments so it was not a creative to the
investor. This didn't benefit the investor
at all even though the revenue has gone up 41% their costs have
gone up. 66 percent. So costs are outpacing Revenue
which means the margins are going down. 22 billion dollar
increases in cost of goods sold and a 990 basis point increase
as a percentage of Revenue. So costs are growing as a
percentage of Revenue, we have sales General and Illustrative
going up 85%, outpacing Revenue. We have the adjusted ibadah
margins here. Look at the ibadah margins,
they've gone from 30 percent to 16 percent margins are being cut
in half going down 23% since 2018.
They point this out as a critical part of the company.
Again, we have the free cash flow hair free, cash flow
conversion of Revenue. Went from 16.5 percent to 1.3
percent down to 89 percent, adjusted earnings per share down
50% adjusted. Dilution per share, 21%,
dividends per share, well, that just completely got scrapped.
So that's down 100%. And then the net leverage amount
of debt. The company has has increased by
a hundred and eighty-seven percent every single operating
metric that you can really look at aside from revenue, has gone
in the wrong direction, and the revenue again was not a creative
because it was a bolt on with massive amounts of debt.
And with dilution it did not benefit the shareholder at all.
And most of that Leverage is caused by the FAA.
Acquisition, which he talks about even further in this
presentation here. And they even highlight this is
not Bob capex issue. While Bob Iger just rejoined.
The board, he has essentially served on the board since 2000
with only a short respite from January 10 months.
So basically, the story right now, is that Disney, it was in
trouble and Bob Iger left and now.
It's going to be saved because Bob iger's back.
And what Nelson Peltz is doing here is pointing out that first
Of all even with Bob Iger at the helm and even with him giving
most of the direction here. Disney still underperformed, Bob
Iger is not doing a good job and not nearly as good of a job as
he's getting praise for. Furthermore, he's also making
the of the argument here. That Bob Iger, never really
left. The guy was gone for ten months
Bob, capek for as unflattering and uncharming of an individual
as he was in the role. And he was not a good pick
still, he was kind of a scapegoat in my opinion for Bob
Iger and a lot of Is he took a lot of blame of things that Bob
Iger did an act. He says here that there are
still several current directors and members of management who
oversaw an approved, some of the Disney's some of Disney's worst
corporate governance and strategic failures, including
overpaying for the fox acquisition, the expanding
streaming losses, and the over-the-top compensation
packages, granted to Bob Iger. Bob Iger has been overpaid, that
is abundantly clear. Look at the performance here,
hair is their tenure. So, they're there for a couple
All of years, we have Bob Iger at the top, there were 22 years,
then the total shareholder return.
This is dividends and capital appreciation since their tenure
and then the total shareholder return then, the S&P 500's Total
return over. That same time period.
In every single case. Every single one of these
directors has been over Disney during a time period where the
S&P 500 has beat Disney Bob, Iger by 63% Susan Arnold by
Said, 124 percent hundred twenty eight percent right?
It's just all different percentages.
So basically Nelson's highlighting here that the
executive team is not getting the job done.
They're not beating the S&P 500. Your opportunity cost is the
market. If a company is perpetually
underperforming, the market, there is no reason to own that
company. It's not rewarding investors.
We have Disney materially overpaying for the fox assets.
When I originally invested in Disney, I saw the operating
leverage of their their initial, I I pee.
My initial video showed the trailer of the Mandalorian.
The first Mandalorian on Disney plus, that one show just that
show. I think got 10 20, 30 million
subscribers to Disney, plus, the initial IP of just a
Mandalorian. They did not need to buy Fox for
fifty two billion dollars to get Disney plus as a successful
streaming service that's what they ended up doing.
Anyways they say the fox deal creates a massive incremental,
Goodwill balance of 50 billion. Disney had to rely on Ultra
Restive two billion dollar, energy assumptions are Synergy
assumptions, rather that's where they'll be able to cross sell
and do all this crazy stuff to justify the purchase.
Most of the time with Acquisitions.
I do not like relying on Synergy as part of the acquisition more
often than not, the synergies don't happen.
They say, which would imply a doubling of Fox's ibadah to
justify the deal. So they bought Fox on the
assumption. That Synergy would cause a
doubling and ibadah and just the opposite.
Happened while difficult to quantify.
They say that we believe Fox's earnings power, have
deteriorated post-deal. Implying an even higher multiple
Pig than the twenty six point five x.
And here's a chart showing their expectation.
Disney's right here. They're they're Fox acquisition.
They think it's going to be like right here they think synergies
is going to make it even worth more rights energy.
They're going to work together and cross-sell and all these
things and it's going to be right here and then what
happened to it? This is what happened to the
ibadah 3. .1 didn't exactly work out.
It was a poor acquisition that they overpaid.
They had no margin of safety with it.
You fox acquisition increase. Disney's leverage dramatically
investors are still paying for the fox deal.
As Disney Works to reduce its leverage.
Disney is also expecting the by Comcast nine billion dollar
stake in Hulu and 2024, which will keep its leverage.
Well, above historical levels for years so free thinking that
Disney's paying down the debt, and it's going to go down,
that's true, they're paying it down right now, 50 billion the
like, for 85 billion. It's going to go right back up
because they're buying Hulu. So don't get too excited.
They're adding on more debt and out of my entire portfolios,
both the story fund, and the passive income portfolio.
Disney is the most leverage company.
I hold by far. This is something that I don't.
Like, I've moved out of Leverage companies, but here we have
Disney, highly levered because of all of these bolt on
Acquisitions. Now, another interesting thing
they bring up is a deal that was not done.
The sky acquisition that Disney wanted to You and Nelson
basically gives this as an example of Disney, having not
learned their lesson. They're still trying to buy
overpriced Assets in the market. They're still trying to buy more
content. The bid that they put in for Sky
represented, a 46 percent premium to Disney's original
offer and a 104 percent premium to the unaffected Sky share
price. Another example of poor merger
and acquisition judgment. So, luckily for Disney
shareholders, this offer wasn't accepted Comcast Stitt.
They had a different reason to do that, but the point stands,
Disney still trying to exercised.
Poor judgment in their merger and Acquisitions.
Luckily, they couldn't buy this deal even though they are trying
to overpay once again. Here's a Bernstein note on the
steel that Disney was eager to do bidding aggressively for
quote, we never understood why this lower growth lower return
and lower multiple business. With undeniable long-term.
Structural risks would enhance Disney's asset mix or contribute
to Disney's deck direct-to-consumer
transformation. By allowing Comcast to Prevail
in the sky bidding war Disney. Avoided paying a massive premium
for business, which is primarily a European DBS.
Distributor, this wouldn't have benefited Disney at all.
There is in my opinion, no reason they should have been
bidding aggressively for this and other investors realize that
as well but they were and the outcome of this would have been
disastrous. Again putting more stress on
Disney's balance sheet that is already very levered.
Had Disney purchase sky on top of the fox deal.
All Disney would have paid 100 billion dollars at a combined
tracks, transaction, multiple of 20 times.
Enterprise Value to ibadah. That is incredibly expensive for
this type of for this type of company pro forma.
It would have added sixty seven billion of net debt to its
balance sheet. This would have put Disney's
debt over 100 billion dollars. I mean, this is incredible that
they're trying to do these deals to just torpedo the company.
So so far, do you agree with the arguments Nelson?
Taking care of poor corporate judgment.
I do I think that he spot on with it.
Furthermore, he highlights the cash flows of the company.
We can look at the earnings per share here.
Now, keep in mind, the gray bar is here, all of this is
fictitious. This is in people's minds and
their judgments about the future.
What's actually happened? It went from seven dollars to
three dollars and fifty cents. That's the earnings per share.
So earnings per share have been decimated and then there's nice
pictures that you can draw on paper about the earnings sky.
Rocketing back up in 2025 but even so I just want to point out
in 2025 even if they hit all of their projections which they've
historically shown that, they're not good at projecting, they're
not good at hitting their targets and they keep revising
their own projections downward. But even on under the assumption
that they somehow miraculously, hit all of their projections,
they're still below where they were in 2018.
So essentially investors are going to be holding this company
for for another three years, to get back to the earnings.
Level. It was four years ago that's the
big pitch to investors in Disney the cash flows paint an even
worse picture. Nine point, eight billion
dollars in free cash flow and 2018 right now we're at one,
point 1 billion. Now, something that they don't
mention on this chart and I can look it up right here.
If we bring up Disney on qual trim, this is available to
Patron members. It's also important, I think to
factor in stock based compensation, because even
though they did one point zero seven billion and free cash
flow. They also paid their employees
with 980 million dollars in stock, based compensation.
So the adjusted free cash flow which were eventually going to
have a chart for that on call trim where we net these two out.
It would be about 70 80 million dollars.
That's what they made in real free, cash flows that can be
returned to investors 80 million dollars.
So even though this is one point, 1 billion, dollars of
free cash flow that is overstating.
The amount of money this leaves to investors, they're
essentially not generating. Any money for investors in 2022.
Then we get to the dividend. Disney is one of the most
commonly owned retail companies, when I talk to different
investors, and I have a lot of chats are different retail
investors Disney's, what are the go-to Investments?
Because it's such a public-facing investment.
It's such a long-standing good company with good IP and it paid
a dividend that's something that retail investors look forward
to. In fact, a lot of them in
retirement. Really look forward to that
dividend in 2020, Disney eliminated, its dividend as it
face cash flow challenges. Has caused by the covid-19,
pandemic, significant streaming Investments and it's over
levered, balance sheet, prior to 2020.
Disney had paid a dividend for 57 straight years with an
emphasis placed on growing the dividend.
So it was a dividend Growth Company.
Disney has not provided a timetable for restoring, the
dividend Beyond achieving prefix, leverage levels.
So they're saying that we need to get our leverage down and
then we'll bring back the dividend.
And, oh, by the way, we're trying to buy all these
different companies to make our leverage go.
So give me a break Disney saying yeah well bring the dividend
back when leverage goes down, but we're actively working to
make the leverage. Go back up, through all of our,
our bids on all these mergers and Acquisitions total,
double-talk doublespeak to investors.
They're saying one thing to you and then they're doing another.
And another thing that I really hate about this dividend and the
fact that Disney scrapped. It is not the fact that they
scrapped the dividend. I don't think that was much of a
problem because covid did shut down all of their parks and I
thought at the time it makes sense, that Disney should halt
the dividend. That's what a responsible
company should do. One of the companies in my
portfolio, I can show you. Right here, is Texas, Roadhouse.
This company, it's a restaurant. So, when covid happen, they
couldn't even open up their restaurant.
All they could do is to go orders and what they did was,
they scrapped the dividend. This is the balance sheet.
Here's the divin hair, they scrapped the dividend.
So we have a dividend payment going from 2020 1/4 but what a
Texas rodeo. House.
Do once their company open back up.
Once covid-19, once they could see people again in their
restaurant, they instantly brought back the dividend and
they did a 20 percent dividend raise.
So they said, thank you shareholders for holding with us
through this troubling difficult time.
By the way, you're getting a big dividend raised, and we're
returning a lot of capital to you.
Everything's back on track. That is good.
Corporate governance. That is relaying the message
correctly. What Disney's done is use covid
as an Cuse to scrap the dividend when the real reason.
They can't bring it back as because of their failed, merger
and acquisition with the fox asset.
So I think it's very disingenuous what the management
team is saying. They're not really highlighting,
the real reason why they can't bring back the dividend.
And then, here's another thing that I think is very
frustrating, which I don't like to see from this company.
And when I was reading through the letter, I think this is
possibly the most disappointing part of this entire slide hair,
Disney's shareholder engagement process or lack thereof is Kate
of of poor governance. They're not wanting any input
from actual investors long-term investors in their company like
Nelson. Peltz people that put a lot of
money behind the company because they love Disney.
They want it to succeed in my opinion, they're giving very
very accurate. Even if it's biting its accurate
feedback, they don't want anything to do with him.
Why did Bob Iger and the board invite Nelson to meet in person
three years ago to hear his views on Disney and barely gave
him any of the same? Opportunity, three years later.
So when times were okay, they will talk to the shareholders.
Now they want nothing to do with Nelson Peltz now that he's
highlighting some problems and things that the management has
done poorly there. In defense mode, they're going
to try to paint Nelson Peltz, has the bad guy a vulture that's
going to come in and stir things up.
He says, in our view, Disney's shareholders engagement process
has been amongst the worst. If not the worst of all the
companies we have ever interacted with Disney's, The
Three luck tonight to interact with shareholders.
It's important for shareholders to know that tree on has a
constructive history with Disney and Bob Iger in September. 2019
Nelson Peltz spoke with the board at the invitation of Bob
Iger about his views on the company.
November, 20, 22, Tree on started a discussion with Bob
capek about the challenges and opportunities facing the company
and requested a board seat for Nelson shortly after the
conversation, the board, abruptly fired capek and since
mr. Tiger was rehired.
The company has barely interacted with Nelson.
After one short call with management Disney rejected,
Nelson's request for a board seat out, right?
The goal of this company, he calls wanting to just have one
board seat, which isn't a huge ask, a lot of activist
investors, they want multiple boards.
These they want to do hostile takeovers, he wants someone,
that's not hostile. Having one board seat is not
hostile, and they reject his request without even considering
it notably, Disney did not even allowed Nelson to meet any
directors prior to turning down his request until we flagged
that it was Highly Questionable of a decision to jump to a
decision without hearing us out. I just look at this and I think
it's such a poor way to conduct themselves.
It reminds me this type of thing.
Reminds me the same way that Disney reacted to Scarlett
Johansson when she sued wanting to get the money.
She was due for her role. Disney came out and publicly
blamed her saying that she was You know, questioning her
motives and made it a big public Fiasco.
It was embarrassing and showed poor judgment from the company.
And here, they have an activist investor.
Wanting one board seat, they turned him down without even
having a meet the board or even hearing what he wants to say.
In every engagement were Tran has asked for board
representation. We were invited in person,
meetings, and extensive interviews with management and
the board, that is normally how it should go.
If an inner, if a investor comes with legitimate concerns
Company, the board should entertain those concerns.
They should have the feedback. That's the sign of a good
company. One that wants feedback on how
to better run the business, but they're totally.
It's like they have an immune defense to it.
We don't want to hear anything from anyone else.
Disney has failed to execute a succession plan, one of the most
important responsibilities of a public company.
So now we have the problem of a key figure Disney's relying on
Bob Iger now and November 20th. Disney announced that Bob Iger
was rehired as CEO. Effective immediately less than
three years after he stepped down but Remain the executive
chairman. Now what Nelson's going to do
here is make the argument that he really never left and that
was the problem to begin with the fact that Bob capek was
abruptly fired, five months after the board unanimously
agreed to extend his contract. By three years suggests that the
board lacks a robust CEO, succession process and
completely misread the state of Disney and Bob, capex
performance. This again shows that they're
not good. Forecasting the future at all,
they're not having good judgment.
They all unanimously agreed to extend, Bob capex contract for
three years and then they fired him almost immediately.
After that, why was Bob capek ever made Co to begin with?
Remember that Bob? Capek was the operator of the
parks. That's what's that was his role.
He never worked on the media side and the production side and
Disney was realigning. Its entire focus into the
production aside the streaming business.
So they took someone that was a Parks, operator and made.
I'm in control of something that he had no experience with good
job Disney management. Now, we have another quote here
that I think is just embarrassing for Disney.
This one comes from Susan Arnold, the chair of the board.
She's one of the longest time board members, June 28th 2022.
This was recent quote. Disney was dealt a tough Hand by
the pandemic. Yet with Bob, chase a peck at
the helm, our business from Parks to streaming.
Not only weather, the storm but emerged in a position of
strength in this Important time of growth and transformation.
The board is committed to keeping Disney on the successful
path. That is on today, and Bob's
leadership, is key to achieving that goal.
Bob, capek, not the new Baba hiker.
Bob, capek is the Right leader at the right time for the Walt
Disney Company and the board has full confidence in him and his
leadership team. Just singing the Praises of Bob
capek right before they fire him, and then blame him giving
him as a scapegoat Note, this is not good management praising,
Someone putting him in a position, watching over him,
putting him in a position where he's basically destined to fail
and then firing him and then pointing the finger at him, is
not good leadership. Furthermore, the company's
profits going down by 50% and then boasting about how well
Disney's doing does not build a lot of confidence for the
shareholder. If you're a shareholder right
now, you know things are not going well with Disney.
And if your shareholder and you realize that the board of
directors thinks things are going well with Well, that's a
problem because we're on different pages.
I view Disney is not doing well. Susan here is viewing, Disney as
doing just amazing. It's doing great, agree to
disagree there. Now, what they point out here?
I think the major point is when Bob Iger left the Disney board,
they appointed him as the executive chairman for the
following two years, which in and of itself is kind of risky.
They pointed out as being very risky.
I've seen it work sometimes. Jeff Bezos is the executive
chairman of Amazon, but in this case, it was Was it was bad.
This was a bad decision because it set up his successor to fill
with the prior Co constantly watching over his shoulders.
That is exactly what transpired we've seen.
All of these different different articles showing how Bob capek
and Bob Iger grew to hate each other.
How did this Feud start? Well, right after Bob Iger step
down, we had covid and they had a disagreement on how to run
things during covid. And what happened was Bob, Iger
went on interviews and said, Yeah.
You know, with all of this covid, I really had to step in
and make sure things run smoothly.
I'm still kind of involved in making sure Disney's doing a
good job and Bob capek is over there saying you just put me in
as a CEO and you're already discrediting.
My work you're saying that I can't handle running this
company through the pandemic. So right there they butted
heads. And ever since that point in
time, when Bob Iger was still involved in the company,
bragging about running it and saving it through covid that
cause bad blood. And so you have Two people in
charge of the company. One is the executive CEO, one of
the executive, chairman, and you have both of them having major.
Disagreements, not like Jeff Bezos, who he's executive,
chairman, but Jeff Bezos. He went off on his private
yacht. He has a city-sized cruise ship
personal boat that he's on, you know, he's doing things outside
of the company. He's not really focused on it
anymore. He might receive a call once, or
twice a week from Andy jassy on what to do in certain
situations, but Jeff Bezos has Were undermined what Andy jassy
has done Jeff Bezos has never question Andy jassi's executive
role and what he's doing there. So I really think this does set
up an argument that the entire executive team at Disney.
The entire board of directors, really set up Bob capek to fail.
They put him in a position. He should have never been put
in. They let him take the fall, they
fired him at the absolute bottom of the stock price, and they
have Bob Iger coming back to save the day.
When Bob Iger never really left. He was Is interfering with Bob
capex, tenure every single part of it every single day, he is
involved in the day-to-day dealings.
He had luncheons with other Executives.
He explained publicly, and privately, all the things.
He thought that Bob capek was doing wrong.
He basically stood stood on the sidelines and just sat there and
complained at Bob capek and undermined his ability to lead.
So that was not a good succession plan at all, and I
don't think that Bob Iger should be Flawless and blameless in
what went on there. And on this note, it's Creating
that while this is happening, all this mismanagement bloated
cost structure and failed to ma, we have the company's CEO.
Bob Iger receiving 216 million dollars in total compensation,
despite Disney's poor total stock performance.
And here it shows, I think the egregious amount that Bob Iger
has been paid compared to the performance of the stock 36
million dollars, 65 million dollars, forty seven million
dollars a year, 21 million dollars a year 45.
Million dollars a year, his total pay package of what he
wanted. Was 423 million dollars for a
company that has underperformed. Both its peers and the S&P 500.
Now we're getting through this but this still doesn't end,
there's poor problems to highlight.
And again, I don't think I don't think he's cherry-picking or
trying to find problems. He's just highlighting what's
going on with the business here. And like I said before, I fully
agree with Nelson Peltz. I am personally thankful that
someone like him is going in and finding During this battle
activist investors. Don't you to do this, you could
just save the trouble, not have the fight, go on to a passive
investment but instead he's trying to work on behalf of
shareholders that can't do it for themselves.
I do not have the capital to be able to sway Disney so someone
like him that does and does it in a good positive way on behalf
of the shareholders? I think is very something that's
good. It's good on behalf of even ETF
holders. If you old, if you hold an index
fund, this is a good thing for you.
Improving the performance of this car.
Company will improve the performance of your index fund.
So even if you're not directly invested in Disney, it's still
good that people like this exist that are doing this work on your
behalf because otherwise, you have a system where Executives
and the board of directors are lining their pockets with
boatloads of cash, while the company is bloated and
underperforming, not a good situation for the equity
markets. Now, this next part, this goes
in to Disney streaming strategy and it highlights a lot of the
differences between Disney and Netflix, I think this is both
informative important to pay attention to.
If you're looking at anything in the streaming industry because
it again, highlights some very key key, pieces of information,
hair. Disney streaming strategy,
ready? Fire the name, we are concerned
with how Disney streaming strategy has evolved under the
board's oversight while we believe Disney plus started as a
niche direct-to-consumer extension of Disney's franchise
flywheel, it has rapidly. I shifted to the core
distribution channel for the majority of Disney's
intellectual property leading Disney to significantly ramp up
investment to drive new subscriber, growth at all costs.
So basically, Disney plus went from this, this little Outlet to
get some premium content. It was highly cost effective,
leverage, their brand IP, and now, Disney's trying their
hardest to turn it into a Netflix, like all content, good,
and bad. All qualities of content just
massive amounts of content. They're trying to play Netflix's
game and Netflix is much better at playing their game than
Disney is and Disney should stay in their Lane and play the game
that they're good at their subscribers have 3x, but their
content spend has 4X, and their profitability guidance has no
change at all. So, what is the rationale behind
this? When it's not a creative to
profitability whatsoever, Disney has lost eleven billion dollars
in streaming to date with more losses.
Coming since 2017 did She has lost a cumulative, 11 billion
dollars, in streaming business. The last number I heard was
eight billion, so every quarter, they're just losing billions,
more management expects, the streaming business to break,
even in 2024, which means two more years of expected losses.
Now here's the problem. This looks very Netflix like
these numbers billions and billions of cash flow going into
the direct to Consumer business, which is all of Netflix.
But Netflix had a reason for doing this.
First of all, Netflix. Rated at time with very cheap
Capital, so they could get very cheap debt, super low interest
rates and they could spend their money very effectively through
licensing, other people's content.
But Netflix also had a build their own intellectual property
Library. They couldn't leverage big
franchises. They cannot leverage Star Wars.
So Netflix had to outspend because of the lack of
intellectual property. They had to make up for it by
producing a ton of content and trying to create franchises from
thin air like Stranger things. That is a much more difficult
task. Disney is advantaged.
They shouldn't have to spend the same way Netflix does to get the
same results and again I take you back to the Mandalorian when
that first season. A Mandalorian was advertised
everybody in the United States wanted to watch it they only
need one show to sell a ten dollar a month subscription and
people paid for it for three months to watch.
One show, that is leverage with IP, Disney has abandoned that
strategy, they say, Disney does Leverage its substantial scale
and streaming. Disney is guiding to direct to
Consumer operating profit of break-even in 2024, by the way,
Netflix is already break. Even so Disneys, two years
behind Netflix in terms of Break, Even when the market
expects the business to generate twenty nine billion of Revenue.
We are surprised that Disney's best-in-class, intellectual
property, franchises and scale have not led to in line if not
Spierer unit economics, compared with Netflix, which generally
lacks the high quality franchise.
IP that is the argument against Netflix all the time, they have,
no intellectual property. I think things are changing.
I think Netflix has proven that it can fabricate.
It can come up with intellectual property out of thin air, and I
think there's plenty of examples of that.
But regardless we go into this, this is I think one of the most
interesting slides here, Disney's direct to Consumer
segments and billions. Here's the margins of it.
You 1% - 21 percent margins - 14 percent margins - three percent
margins and then in 2025, barely Break, Even 2.7 percent positive
margins. So they have to go all the way
to the end of 2024. And then finally in 2025,
they'll barely break, even with their streaming service at
similar scale of minus 3.6 percent margins.
Netflix has 18.2 percent margins.
Netflix is a much more Cost effective business with their
content than dizzy. Let me repeat that.
Netflix is leveraging their content and their spend on
content more effectively than Disney.
Now, again, there's lots of opinions and arguments on
Netflix, I'm aware that it's not a popular investment.
I don't think really anybody. I know likes the investment
besides me, but I look at Netflix and I think that the
argument that they don't have intellectual property, they have
no shows people really want to watch.
I think, stranger things, proves that wrong.
Pitcher Wednesday was a massive Global hit.
They're going to be doing season after season of that.
That's one of their most watched shows.
In fact most of their most watched shows just came out last
year, Dahmer, those type of shows, always do really well for
Netflix, they have massive documentaries, they have comedy
specials, they have things like squid game, International
successes that come out of Korea and I think there's going to be
more of those as well. So the idea that Netflix doesn't
have any content that people want to watch.
I think is just, it's something it's a narrative.
That will never end. I don't think people ever be
convinced otherwise no matter what the numbers say.
How many huge breakout success is Netflix has I don't think
they're ever going to change that narrative.
But regardless we have the data here, basically proving that
Netflix is more effective with their content spend, than Disney
Disney's current streaming strategy, is leading to in
efficiencies Netflix. Generates 61 percent more
Revenue than Disney and streaming.
Okay, Netflix spends, thirty four percent more on
programming. Action cost than Disney.
So Netflix spends, thirty four percent more to generate, sixty
one percent, more Revenue, Netflix spends, thirty percent
less on other expenses than Disney they're literally
spending less to generate far more Revenue.
They are much more cost-effective than Disney on
the streaming front and Netflix ibadah margins are 4,000 basis
points higher than Disney. We have the E bottom margins of
Netflix right now, at 18.2% for Disney.
It's - 21.9%, which is a 40 percent.
Difference, I think with observing the streaming industry
over the past three years, it's shown that what Netflix has
accomplished already. In my opinion, is much more
difficult than what most investors are making it out to
be. Getting to scale becoming
profitable on a free cash flow basis, even adjusted for
stock-based. Compensation is incredibly
difficult. Even at the power, the
intellectual property, even with the parks subsidizing.
It Disney's not even close to Netflix, not even close.
They are under price. Their service compared to
Netflix. There are subsidizing the cost
they're throwing their free cash flow in the - losing 11 billion
dollars so far with two years of projected losses and they're
still not even close to Netflix. All of that effort just to try
to catch up to him. Despite Management's rhetoric,
We Believe Disney has never thoroughly reviewed its cost
structure as evidenced by the fact that over the last three
years costs have outpaced sales by four hundred basis points.
Sales have gone up six percent, that's the revenue of the
company. Costs have gone up 10% when
costs are out scaling sales, you're not becoming more
operationally efficient, you're becoming more bloated.
Now we have the one good part about Disney, the thing that's
actually going well so far which is the parks.
But there's even arguments against that he's making the
case here, that the parks are over earning.
And I think this is part of Che Peck.
He went in, and he basically raise prices to the max, with
the park, really squeezing Disney.
Customers nickel, and diming, you have to have the A Disney,
what is it that Genie thing where you have to pay $20 per
person per day on top of that? There's extra rides you have to
pay extra to skip the lines, the prices of everything, in the
park have gone up. The park, attendance has become
a different experience because it's becoming very expensive.
And even though that works in the short-term raising prices,
it's a dangerous strategy in the long term.
Disney has historically relied on price to drive growth and
margins at domestic Parks which we believe is an unsustainable
growth strategy. Continue.
Lee just raising price after raising price before the
covid-19 pandemic, Disney's domestic Parks had grown per
capita guest spend at a 6%. Compound annual growth rate
that's from 2011, to 2018 with more muted attendance growth.
This is shifted dramatically with management noting that per
capita spending grew nearly 40% and fiscal 2019.
So the price people are paying in the parks on average since
2011, to 2019 was 6%. And then it went up, 40% in a
Year that is incredible. All of a sudden, the parks got
dramatically more expensive in here.
We have the highlighted problem that Disney has become dependent
on their parks to fund the rest of their business.
This is not a good situation to be in, they're basically relying
on it, they can't lower prices because it's paying all the
bills. Paying down their debt, paying
all their interest expense paying for all the streaming
capex. Spend a lot of that is coming
from the Parks. From 2019, it was 30% now, it's
44 percent. Not a good situation to be in.
So overall, All again, in my opinion, I was reading through
this and I thought these criticisms weren't only
warranted. I thought they were excellent.
I think that his analysis of the company and the problems with it
are dead on. There's a reason why Disney is
rejecting Nelson Peltz. There's a reason why they're
going to try to convince you. That it's not in your interest
to have him on the board, but don't be fooled.
If you're dizzy investor, you want Nelson Peltz on the board.
You want him to get things into shape because a company.
So far has been run in a way that And if it's to co-benefits
the directors, but does not benefit the shareholders and
that needs to change. So my opinion, I'm going to look
for Nelson Peltz to get his board seat.
I want him on the board and honestly, I'm at the point now
with Disney that I've seen so much mismanagement, I've been
looking for an exit with this company, looking for a little
bit, better of a bid from the market.
If Disney successfully rejects, Nelson Peltz board seat and he's
not able to get in and actually help this company and he, Just
bails out and says, okay, they don't want my help.
I'm probably going to sell my shares, that'll probably be the
point where I say, there's other companies I can invest in, but
if he is able to get on this company, he has a very good
track record of turning these type of companies around.
So I'm going to wait and see right now.
I've held Disney for a long period of time.
It's not my biggest holding by any means, but it's a company
that I still think has a ton of potential that's being unmet.
And if Nelson Peltz is able to make the company going a better
Direction, I'll continue to hold my shares.
So that's my thoughts so far, I hope you enjoyed this little
update. Eight.
See you in the next one.