Asking yourself what stock you would buy if you could only buy one is an interesting thought experiment. For me, it instantly forces me to think long-term. Listing qualities I find desirable, ranking them by importance, and then searching for a company that fits the description.
If I hold a one-stock portfolio, the qualities I am looking for are a diversified business, sustainability, and a fair price. Out of the three, the most important is sustainability. I am willing to pay a premium for a company that meets other requirements, and a business that endures can eventually diversify.
Walt Disney (DIS 0.16%) hits the mark on all three criteria here, and it would be the one stock I would buy right now. Here's why.
Image source: Getty Images.
Disney has built itself into a diversified business
Disney has managed to develop diverse operations while remaining focused on one service: entertainment. The company's two primary sources of revenue and profits are its cable networks, like ABC, ESPN, National Geographic, and The Disney Channel, and its theme parks. Importantly, both segments, while focused in the U.S., have a significant international presence. Together, in fiscal 2019 the two business segments accounted for 73% of revenue and 96% of operating profits. 2019 figures are more informative because they exclude the temporary disruptions caused by the pandemic.
Additionally, multiple Disney-controlled film studios have been producing box office hit after hit for decades. The studios segment accounted for 16% of overall revenue and 18% of profits in 2019. Again, due to coronavirus disruptions, 2019 figures are more informative to consider.
Finally, the most important piece of diversification came late in 2019 with Disney's push into streaming services with the launch of Disney+. The service has reached over 116 million subscribers and helped Disney's overall streaming segment reach 174 million as of July 3. This is an important piece of diversification going forward because it offsets a long-running secular decline in traditional cable subscriptions. With the addition of a viable streaming alternative, Disney fans who want to switch from cable to streaming no longer have to leave the company and the company can transition its revenue stream.
There is sustainability in what Disney offers
Disney has been delighting families in some form or another for nearly a century now. What's more, the company's products and services remain relevant over the long term. It is not uncommon for a parent to show a Disney movie to their own children that they first saw as a kid. The same is true for theme parks. Visitors have such fond memories of visiting a park as children that they often take their kids to experience some of the same.
One of the components of sustainability is being able to protect against other businesses stealing your customers. In Disney's case, it would not be easy and it would take decades for another business to build Disney's kind of customer relationships.
Another sustainability component is profitability. After all, it would be easy to create a wonderful customer experience at a loss to the business. That's not the case for Disney. Over the last decade, the company has earned an average operating profit margin of 22.3% (and that's including the effects of the pandemic).
How about the stock price?
It's difficult at the moment to fairly measure Disney's valuation considering price-to-sales ratios or price-to-earnings ratios because of the temporary disruptions of the pandemic. Instead, let's compare its absolute stock price now and before the pandemic's onset, added in any changes during the pandemic that will be long-lasting, and determine if it's a fair value.
Using that basis, from Jan. 1, 2020, to this writing, the stock price is up 25%. What long-lasting changes have occurred since then? Well, for one thing, the company proved it would be a major force in streaming content, reaching 174 million subscribers (across multiple services) in a relatively short amount of time. A 25% premium seems like a fair price to pay for the benefits of an added streaming segment.
Disney checks all my boxes, and it would be the one stock I would buy if I chose only one.
