Florida's New Law Lands Disney's CEO in Hot Water

Media giant Disney's (DIS) CEO is in trouble... Bob Chapek has found himself at the center of unwanted attention over the company's initial lack of a response to Florida's "Parental Rights in Education" bill, aka, the "Don't Say Gay" bill. The legislation, which was signed into law on Monday, prohibits "classroom discussion about sexual orientation […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Florida's New Law Lands Disney's CEO in Hot Water By Berna Barshay --------------------------------------------------------------- [Forensic Accountant: Big asset shift is coming]( Man who briefed U.S. Pentagon officials five times in past year says digital tech stocks will get steamrolled by something you've never heard of before. [Click here to learn more](. --------------------------------------------------------------- Media giant Disney's (DIS) CEO is in trouble... Bob Chapek has found himself at the center of unwanted attention over the company's initial lack of a response to Florida's "Parental Rights in Education" bill, aka, the "Don't Say Gay" bill. The legislation, which was signed into law on Monday, prohibits "classroom discussion about sexual orientation or gender identity." While advocates say the bill puts the power of making sex education decisions back in the hands of parents, opponents argue that the law erases identities for same sex parents and LGBTQIA+ teachers and students. Regardless of where you may stand personally on the bill, the overwhelming majority of Disney employees hate it. The company employs many LGBTQIA+ individuals in Florida, as well as in California, New York, and elsewhere. This month, we've seen employees stage walk outs, ESPN anchors go silent in protest during a women's NCAA basketball game, and countless celebs associated with Disney publicly state their opposition to the law, arguing that the company should have more actively lobbied against it. And on Sunday night on ABC, the three female Oscar hosts danced around the stage during the opening monologue chanting the word "gay" and directing the performance at Florida. Both ESPN and ABC are owned by Disney. And of course, people took to the Internet... Source: Twitter/@DisneyWalkout Disney has a long history of being on the forefront of supporting its LGBTQIA+ employees – it was one of the first companies to offer health benefits to same sex partners back in the 1990s. The Parks have also hosted unofficial "gay days" for decades, and the festivities have gone official in recent years with rainbow Pride merchandise galore on sale. Given Disney's history, it's surprising that the company stood down on the bill and tried to stay neutral... and that it made political contributions to politicians pushing the legislation. Employees are angry with Chapek... They think that a company whose mission is all about serving – and profiting off of – children is an accomplice in putting them in harm's way. Chapek initially tried to play down the controversy and sent a company-wide memo stating that Disney prefers to make statements via its content rather than by lobbying. That fell flat, as did his attempt to quell criticism by donating $5 million to the Human Rights Campaign, an LGBTQIA+ advocacy group. The group rejected the gift. Making matters worse, his beloved predecessor, Bob Iger, tweeted his opposition to the bill in late February... Source: Twitter/@RobertIger The situation continued to escalate with employees of the Pixar animation division leaking tales of censorship from the top. Chapek eventually apologized to the whole company in a mid-March e-mail and got an audience with Florida Governor Ron DeSantis, who later dismissed Disney – which employs 80,000 people in Florida – as a "woke corporation." --------------------------------------------------------------- Recommended Link: [Buy Reservoir Media (RSVR) immediately]( You could make a great deal of money on this little company by using the "backdoor" we've discovered. Even if you don't buy it, have a look at why we're targeting this stock right now... because it holds the key to exactly where stocks could go next in the coming weeks. [Full details here](. --------------------------------------------------------------- Handpicked by Iger, Chapek's short reign at the top of the House of Mouse has been full of controversy... After taking the helm in late February 2020, Chapek made a series of drastic restructurings that changed reporting lines in ways that upset many longtime employees. He also transferred one of the creative standouts of the company – Disney Imagineering – from California to Florida, prompting many Imagineers to quit. He also took P&L responsibility away from many seasoned Disney veterans, instead consolidating that kind of decision-making power under his close lieutenant, Kareem Daniel. These moves have led to a period of heightened turnover and sinking morale in many departments. Chapek also alienated many in the creative community over the way Disney very publicly brawled with actress Scarlett Johansson, who had to sue Disney to get what she had been promised when they shifted Black Widow from an exclusive theatrical release to a hybrid one in theaters and as a premium video on demand ("PVOD") title on streamer Disney+. [Johansson eventually got her money](... and Disney alienated top talent for nothing. Not only has Chapek often enraged employees, he also has greatly angered many of his most loyal customers... Using the pandemic for broad cover, the Parks Division has started charging more for less. The FastPass service that used to be free has been replaced with an inferior ride reservation system – at the cost of $15 per day per person. The free airport transfers to Disney resorts in Orlando were scrapped at the beginning of this year. Live shows and entertainment have been slow to come back or have returned in a slimmed down way, even as parks have been packed. Even food portion sizes have shrunk. And customers have noticed all of this. Turning back to the Florida legislative controversy, Chapek's initial stance was part of a deliberate move to shift the corporation from the left to center and avoid political controversy generally... Well that sure didn't go as planned. While in theory a shift to the center and neutrality sounds good, it may not be possible in these divided times, especially from a company that tells stories – with so much of the storytelling reliant on a creative class that skews decidedly left. Puck columnist Matthew Belloni accurately summed up the situation... It's also pretty clear that openly stating a goal of political neutrality at a creatively-driven company isn't possible in today's climate, especially on subjects that a vast number of employees consider issues of human rights and equality, not politics. Plus, Iger has conditioned Disney employees to expect the CEO to "stand with us entirely," as the Pixar letter put it. Chapek and his new comms chief misread the room and badly miscalculated how this would all play out. Chapek's relationship hasn't just soured with Disney employees and Parks die-hards... He has also lost Iger. According to a searing report from CNBC last week, the two former colleagues no longer speak. The origin of the tension was Iger's hands-on approach to being chairman in the early days of the pandemic. Chapek didn't think he needed the help... and he certainly didn't want it. The CNBC article notes that "Internal messages about business strategy from both men would sometimes conflict, as it became clear the executives weren't speaking with one voice." Late in 2021, Iger threw himself a going-away party as he approached his ending date as Disney chairman. While Chapek was invited, the two didn't speak, were seated at opposite tables, and other guests told CNBC that it was "awkward." Despite all the bumps, Disney has delivered... As I discussed last month, [Disney put up a near perfect report for the quarter that ended in December](. Streaming subs beat expectations, the content pipeline sounds strong, and the Parks division blew it out of the water. The message was that Disney has exited the pandemic stronger than it went in. That's probably true... and quite the accomplishment. And yet, as of yesterday's close DIS shares are up just 11% in the more than two years since Chapek took over as CEO. And they've underperformed the benchmark S&P 500 Index handily, which is up 48% over the same time frame... That kind of lackluster stock performance isn't going to get Chapek fired... and it's unlikely that his missteps in Florida or elsewhere will either. If the stock dove another 20% or 30% in a flat tape... Chapek might have more to worry about in terms of the renewal of his CEO contract, which expires in February 2023. But it's important to remember that companies have many stakeholders – shareholders are just one group. Customers are another... And so are employees. And Chapek isn't passing with flying colors for those contingents right now. But Chapek seems to have learned his lesson. On Monday, as the "Don't Say Gay" bill became law, Disney issued the following statement... Florida's HB 1557, also known as the "Don't Say Gay" bill, should never have passed and should never have been signed into law. Our goal as a company is for this law to be repealed by the legislature or struck down in the courts, and we remain committed to supporting the national and state organizations working to achieve that. We are dedicated to standing up for the rights and safety of LGBTQ+ members of the Disney family, as well as the LGBTQ+ community in Florida and across the country. Better late than never? Maybe – if you ask Disney's legion of LGBTQIA+ employees, customers, and their allies. A crass, pandering capitulation? Yup, it's probably that too – if you put on your cynic's cap. Whether you love or hate the Florida legislation, one thing is clear here... Neutrality wasn't a viable option. I've written before that in these modern times, companies need to pick a side – and there's no better example than the Chapek flip-flop to prove that. Employees and customers are demanding that corporations align with their values... and Chapek learned this lesson the hard way. Had he not figured this out, he might have found himself looking for a new job in 2023. In the mailbag, a reader asks about the case for high multiple, high growth stocks – and asks specifically about two past picks... Do you think employees have a right to demand that their employer aligns with the prevailing values of its workers? What do you think Chapek should have done differently? Do you think Chapek is going to get his contract renewed... and should he have his contract renewed? Send an e-mail with your thoughts by [clicking here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna). "Dear Berna, I am a big fan of your articles, your writing style, and your analysis of companies. "Now, having written the above and as a dyed in the wool (sounds better than cheapskate) value investor, I read with interest about your investments/recommendation of Airbnb (ABNB) and Roblox (RBLX), as these are two stocks whose business models are very appealing as they capitalize on other people's assets (ABNB) and/or intellectual property (RBLX). Last I looked both companies trade at more than 20 times their Enterprise Value/Sales. "Kailash Concepts recently published an analysis of the returns of investing specifically in these high P/S companies, and the results appear not to be very encouraging. You can find this report [here](. "I would be grateful if you can give me the benefit of your rationale for thinking that the two companies you are so bullish about will beat the odds and turn out to be great investments despite their current valuations" – J.S. Berna comment: First, thank you, J.S., for the kind words. Second, turning to the current valuation of Airbnb and Roblox... ABNB shares trade at an enterprise value ("EV") of 17 times 2021 revenue and 14 times estimated 2022 revenue. RBLX shares trade at 15 times 2021 revenue and 10 times estimated 2022 revenue. Don't get me wrong – these are still hefty multiples. However, they aren't anywhere near 20 times now that ABNB shares are around 15% off their highs and RBLX shares are roughly 65% off their highs. But yes, they were both once trading more than 20 times sales. Airbnb has primarily grown its way out of this valuation. The stock was trading at 26 times revenues at the end of 2020, shortly after the initial public offering ("IPO"). The company has almost doubled sales since then, though. Part of that growth came from the pandemic recovery, but some of it is from the short-term rental business model taking share from hotels because Airbnb is a better product for certain types of stays. Airbnb often saves money on long stays (a week or more), especially with multiple travelers – particularly families with children or multiple singles or couples who are traveling together. And it offers a differentiated experience that is often more convenient (like having a kitchen or washer/dryer) or more pleasant (like a private pool). In many cases, Airbnb is a better mousetrap... which is key to my bullishness. This company can be a share taker for a long time. In the case of Roblox, the decrease in the multiple is more the result of the stock falling. Roblox is the more speculative of the two companies we are discussing... but my bullishness stems from the wide participation and high engagement of users, as well as the fact that the user base is diversifying. In summary, qualitatively, based on observed consumer behavior – and observing consumers and predicting their future behavior is my ultimate wheelhouse – I think these companies will thrive and grow for a long time. It's also important to note that the price-to-sales (P/S) ratio is an imperfect metric that's best applied to unprofitable companies when there is no other valuation metric available. I prefer to look at free cash flow ("FCF") yields, price-to-earnings (P/E) ratios, and the ratio of EV to earnings before interest, taxes, depreciation, and amortization ("EBITDA"). Both Airbnb and Roblox are EBITDA and cash flow positive, so it's better to look at those metrics. Valuation must also be considered in the context of profitability and cash generation. EV-to-sales ratios don't take profitability or cash flow into account. Higher profitability or cash flow generation should earn a company a higher EV to sales multiple. Airbnb had a healthy 11% EBITDA margin in 2021... and that margin is expected to bump up to 26% in 2022, which is a top-tier figure. Airbnb also looks cheaper on an FCF basis – it generated a very healthy $2.2 billion in FCF last year. Many of the companies in the 20 times sales universe generate no cash. Roblox had negative EBITDA last year but is expected to generate nearly $500 million in EBITDA in 2022 and print a respectable 17% EBITDA margin. While it had no EBITDA in 2020, Roblox generated nearly $600 million in FCF... and it should do even better this year. Due to the intricacies of its accounting, the profits of Roblox greatly trail its cash generation. When you consider FCF, the $26 billion EV of Roblox looks a lot more reasonable than its multiple of sales. Every company is unique... I am also by nature a value investor. It has taken me a lot of time to get comfortable paying up for growth. I only do it when a company is truly special qualitatively and when digging deeper into the financials justify it, as it does with these two stocks. Regards, Berna Barshay March 30, 2022 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](