Walt Disney bringing back Bob Iger 'improves the risk-reward' but challenges remain: MS
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Walt Disney's (NYSE:DIS) stunning decision to replace Bob Chapek as CEO with former chieftain Bob Iger has improved the risk-reward for the stock, Morgan Stanley said, but there are still challenges ahead.
Analyst Benjamin Swinburne, who has an overweight rating and a $125 price target, noted that Iger gives the investment bank confidence, given his experience and credibility. However, with Disney's (DIS) shares near the lows seen during the early days of the pandemic, it will be key for Iger to demonstrate value soon. 
"Specifically, Disney's content is under-earning and under-monetized," Iger wrote in a note to clients. "Bob Iger now has two years to sustain and enhance the company's creative output, aggressively manage the cost base to reflect the reality of today's media environment, and execute a successful succession to a new CEO."
Swinburne added that Disney (DIS) is facing a number of challenges and even though the company's parks business adeptly navigated the pandemic, essentially emerging "as strong as ever," its media business has been plagued with rising costs in pursuit of streaming to compete with the likes of Netflix (NFLX), HBO Max (WBD) and others.
The analyst noted that the returns associated with Disney's (DIS) creativity over the past two years have "deteriorated" and could be the result of unintended consequences of the major management reorganization that the company underwent a couple of years ago to help streamline decision making, but resulted in a lack of financial accountability. 
"We can see this in Disney's streaming segment, where its non-content cost base already exceeds that of Netflix despite a $10B+ smaller revenue base," Swinburne explained. 
In its fiscal 2022, Disney's (DIS) direct-to-consumer business had a $4B loss in operating income and is expected to lose between $2.5B and $3B in fiscal 2023, while the company's overall guidance for fiscal 2023 was seen as lackluster, due to margin pressures for its linear networks, a fact not seen elsewhere in media," even given the problems in the industry as a whole.
Swinburne also pointed out that Disney's (DIS) primary source of free cash flow in media, ESPN, has been adversely impacted as cord-cutting has accelerated to roughly 7% year-over-year, compared to when he left in 2020. 
Even with all of the negativity, Swinburne noted that there is still a lot to keep Morgan Stanley bullish on Disney (DIS), "especially given indications of a new level of urgency" at the company. These include continued streaming adds, the continued success of Marvel films, as well as advertising strength for ESPN.
Swinburne added that Iger's return to Disney (DIS) could see a "strategic shift," noting that the 71-year-old chieftain led the acquisitions of Pixar, Marvel, Lucasfilm and 21st Century Fox during his first tenure, while also divesting ABC Radio and Citadel Broadcasting.
It's too soon to discuss what major moves Iger might make, but Swinburne added that he would not rule anything out in an effort to "put the company in the best position possible for long-term success." Some analysts speculated that Iger's return to the CEO job could mean Disney (DIS) might explore pursuing new initiatives in the metaverse.
Disney (DIS) recently reported fiscal fourth quarter results that led to a sharp slide in the stock.