Why Disney Is a Classic Rule Maker, and Why It Should Be in Every Investor's Portfoliohttp://www.fool.com/investing/beginning/2012/11/01/why-disney-is-a-classic-rule-maker-and-why-it-shou.aspx John Grgurich
November 1, 2012
When I began investing, I was starting from a knowledge base of zero.
One of the first books I read was The Motley Fool's Rule Breakers, Rule Makers. In it, Motley Fool co-founder Tom Gardner laid out specific criteria for crowning a company a "Rule Maker": a mature, consumer-facing business that's king of its market space, and an investment that can confidently and profitably be held on to for years with only quarterly check-ins.
His step-by-step process for analyzing a business was an easily understandable way for a beginner like me to quickly get up to speed, but its back-to-basics approach will benefit even advanced investors. Today we're going to run entertainment legend Disney (NYSE: DIS ) through Tom's merciless gauntlet and see exactly what makes it a classic Rule Maker. We'll also touch on the biggest Disney news of the week, possibly even the century: The purchase of Lucasfilm for $4.05 billion.
1. The mass-market, repeat purchase of low-priced goods
And now, with the purchase of Lucasfilm, which will give Disney the rights to everything Star Wars and Indiana Jones, if Disney wasn't the world's premier entertainment force before, it is now.
And if there's any entertainment company that could justifiably be called a "necessity," it's the House of Mouse. People need their fix, kids and adults alike. Disney, then, is a perfect example of a company that makes mass-market, repeat-purchase goods -- because everyone needs to see Star Wars 16 times, like I did when I was a kid. As such, Disney easily makes our first Rule Maker grade here.
2. Gross margin
It must be noted that not all industries are created equal, and in some industries you're just not going to get to that 60% Tom Gardner so enjoys seeing. The industry average gross margin TTM for the entertainment sector is 36%, but even using that as a fill-in benchmark, it's clear that Disney could be doing better.
3. Net-profit margin
4. Sales growth
5. Cash-to-debt ratio
Money is so cheap right now