Warren Buffett once remarked, 'I prefer a lumpy 15% return to a smooth 12% any day.' This sentiment should guide investors considering purchase of Walt Disney (NYSE:DIS) shares right now. It is no secret that Disney could have a massive 2015, but the market is valuing shares as if the future will be much more pedestrian. In a competitive, crowded landscape that includes Time Warner (NYSE: TWX) with their Hobbit franchise and stellar HBO shows, NewsCorp. (NASDAQ: NWS) with their good film slate and industry-leading news outlet, and Viacom (NASDAQ: VIA) with a full stable of TV and film properties, Disney still reigns as the content leader.
Two main theories might explain the market's failure to properly discount such a rosy future. First, is the concern that future windfalls will be confined to the film division, thereby barely moving the needle for Disney. Secondly, 2015 is still a ways off, and there are macro risks as well as opportunity costs of owning Disney in the meantime. This article will explain why neither of these concerns hold up to close scrutiny.
To the Movies......and Beyond!!
The excitement in 2015 will certainly begin with movies. Investors really need to realize the scale of the movies coming. Avengers 2 and Star Wars are as close to sure things as it gets. Also, a recent court win for Disney tightens their grip on Marvel I.P. Additionally, there should be some extension of the film success into Disney's other units.
While true synergies range from the elusive to the chimerical in corporate America, Disney is one of the lucky few that actually realizes them. Disney should bank plenty of merchandising revenue from Avengers, but even more impressive should be Star Wars merchandise, which makes hundreds of millions even in off years. It is no guarantee that the LucasFilm acquisition will be accretive, but the fact that Lucas himself is holding onto his Disney shares augurs well for the deal.
So, 2015 has huge potential, but why buy right now? Aren't there a lot of macroeconomic headwinds, not to mention opportunity cost of owning Disney versus other stocks? Regarding general market risk, the individual investor must make up his/her own mind, but during tough times a stalwart like Disney is a relatively good bet.
Regarding opportunity cost, it is entirely possible that Disney languishes at current levels for a while-or potentially falls along with the broad indices- as investors wait for 2015 to get closer. This myopic view could cost investors who seek an attractive entry point into a legendary blue chip. Long-term investors should compare Wall Street's short-term thinking to the long-term windfall that Disney stands to gain. Huge pockets of inefficiency wait beyond the quarter-to-quarter obsessions of Wall Street analysts.
Furthermore, Disney looks set to have a solid 2014 as prelude to its blockbuster 2015. THOR 2(2013) is enjoying a halo effect from the Avengers, Captain America should enjoy this halo plus the cachet of Robert Redford, Guardians of the Galaxy is coming into focus, the INFINITY video game seems poised to be a must-have for the holidays and beyond, and the animated movie Frozen is seeing very strong business. In fact, Frozen could become its own economy if music sales, and toy sales continue at a rapid clip. On the other side of 2015, things don't exactly slow down either. Star Wars spinoffs, more Marvel expansion, and Wreck-it-Ralph and Pirates of the Caribbean sequels promise to replenish Disney's coffers for years to come.
Warren Buffett has also said, "Own a company any idiot can run, because someday one will." Disney is a company with such unassailable economics, but happens to currently be run by the highly capable Bob Iger. Iger clearly has an eye for excellent acquisitions, but also knows when to show restraint. ($6-8 billion in buybacks should buoy shares going forward.) There is no dilutive empire-building happening at Disney, only shareholder-friendly allocation of capital.
At 22 times trailing earnings, Disney does trade at a premium to its peers. Time Warner trades for 16 times earnings, Viacom at 17 times, and Newscorp at 15 times. What puts Disney a cut above-and justifies its higher p/e is its ability to monetize brands across its business and even across time. A brief visit to Target drove home this point.
While products from the Frozen movies were doing brisk business at Target, one could also observe robust business for many of Disney's older princesses. This is anecdotal of course, but reminds an investor of the staying power of Disney characters. A staying power that widens their moat, leading to above average returns. If you want to be in equities, consider Disney as a core holding. After all, like its wildly popular cruise ships, the stock could soon set sail for good.