The daunting challenge ahead for Disney CEO Bob Chapek

When the company reported quarterly earnings after the market close Thursday, the results blew past analysts’ expectations. The consensus earnings per share estimate was $0.54; the actual number was $0.80. So it may seem unsurprising that the stock price jumped 5% in after-hours trading, the largest after-hours gain of any stock in the S&P 500 that day.

But the positive bump was by no means assured. Now that the Delta variant has brought COVID’s third wave upon us, results for the quarter that ended July 3 reflect a world we’ve left behind. Stock prices depend on expectations, not the past, and neither Chapek nor CFO Christine McCarthy made any grand promises in their call with analysts.

“Strong demand for the parks is continuing,” Chapek said, and bookings on the company’s cruise ships “look strong.” McCarthy said the company will not pay a dividend for this year’s first half, continuing a pandemic policy. Nothing dramatic or surprising.

Investors may figure that, through sheer luck, Disney has an anchor to windward no matter which way the wind blows. When the virus was raging last year, consumers abandoned movie theaters and theme parks (many of which were closed) but stampeded to sign up for the Disney+ streaming service. When the economy began to open up in this year’s first quarter, Disney+ subscriber growth slowed, but stir-crazy consumers returned to theaters and parks.

Looking only ahead, as investors must always do, the biggest question for Disney and its shareholders is much larger than any quarter’s earnings. It’s how well Chapek handles one of the hardest assignments in corporate life: following not one but two great CEOs.

In 1984, Michael Eisner began the rescue of a famous company in decline, increasing the share price (adjusted for splits) from $1.20 to $33—a knockout compound annual growth rate of 17%—by the time he stepped down in 2005. His successor, Bob Iger, expanded the company’s scope far beyond princesses and cartoon animals, buying Pixar, Marvel Entertainment, and Lucasfilm. Those transformative acquisitions brought Buzz Lightyear, Captain America, Luke Skywalker, and dozens of other characters worth billions when deployed in movies, theme parks, merchandise, and TV programming. He also quietly began planning the Disney+ streaming service years before it went live in November 2019.

Chapek succeeded Iger in February 2020, just as the pandemic arrived. It’s hard to gauge how well he has performed so far. The pandemic looked like a disaster for Disney in the pandemic’s earliest days; the stock cratered, then roared as millions of homebound consumers chose Disney+ to fill their idle hours. From March 2020 to March 2021 the stock more than doubled, but much of the credit must go to Iger and COVID-19.

Further muddying any assessment of Chapek’s performance as CEO, Iger remains executive chairman until the end of this year. As a practical matter he’s still the boss, if no longer the company’s public face.

What we know for sure is that the most valuable asset Chapek inherited from Iger and Eisner is investor trust. Many people, reading about the stunning growth of Disney+ and how it’s powering Disney’s stock, may be surprised to learn that Disney+ hasn’t made a dime of profit. It’s losing billions of dollars and is on track to continue doing so until 2024. Investors are fine with that. The company is spending big on exclusive content for the service as it competes with Netflix, Amazon, and a legion of other streamers. Later, after the inevitable shakeout, it will raise prices and make money. When Disney outlined that plan in a presentation last December, the stock rocketed. That fact is worth remembering when we hear other CEOs complain that investors won’t let them manage for the long term.

With the post-pandemic era now suspended until further notice, Chapek needs that trust more than ever. Wall Street hasn’t turned against him, but for the first time in months analysts are evenly split on whether the stock is worth buying at recent prices. An estimated 87% of its value is based on future profits above what the company has been making lately, says an analysis by Institutional Shareholder Services.

Chapek must avoid disappointing Disney’s many believers in these tumultuous times. He has great assets to work with. But he also has two very tough acts to follow.

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