Six of the top 10 highest grossing films of all time have been produced by Walt Disney (DIS:NYSE) in the last 10 years. Owning the eponymous animation studio as well as the Pixar, Star Wars and Marvel franchises, the company has a strong claim to be the leading content and entertainment business in the world.

A 45% decline in the share price in 2022 to levels last seen in the early stages of the Covid-19 pandemic has created an outstanding buying opportunity. Buying shares in high quality businesses when they are going through a rough patch is often a successful investment strategy.

The return of Bob Iger to the top job after a difficult tenure for his one-time successor, now predecessor Bob Chapek, was received positively by the market when it was announced in November 2022.

Iger has given himself two years to get the ‘House of Mouse’ in order. To begin, he is likely to give divisional teams, particularly in the creative parts of the business, a freer hand to make their own decisions. A decentralised corporate structure was key to the success of Iger’s previous tenure from 2005 to 2020. Reports suggest staff morale deteriorated when Chapek was in charge.

The returning boss may dial back content spend at the Disney+ streaming platform while pushing through further increases in the price of a subscription. Disney is rolling out an ad-supported version and we are confident in its ability to retain and attract subscribers thanks to a library of historically successful films and TV shows.

The company’s cost structure is likely to be reviewed to see where savings can be made – if substantial, that alone is likely to be a major share price catalyst.

Disney’s creations resonate with viewers on a deeper level than other entertainment because people can interact with them at the company’s theme parks and resorts. This part of the business bounced back strongly in the 12 months to 1 October 2022, with revenue up 73% to $28.7 billion.

Credit ratings agency Fitch says: ‘Disney’s parks business has rebounded faster than expected and could have a stronger operating profile going forward as the company incorporates its dynamic pricing strategy to better balance park attendance and per-capita spending to expand operating margins.’

There are risks facing Disney including a structural downturn in its linear TV operations and a $45 billion debt pile (built up in part thanks to its 2019 acquisition of 21st Century Fox). Yet in our view these are more than reflected in the current valuation.

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