"When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever." -- Warren Buffett
When you invest in top-quality businesses with rock-solid competitive strengths and superior profitability, you are putting time on your side. As long as sales and cash flow move in the right direction, the business becomes more valuable over time, so these companies can be ideal candidates to invest for the truly long haul, perhaps even forever.
The entertainment industry can be cyclical and volatile, since it's directly linked to consumers' mood and discretionary spending. On the other hand, Disney is no average industry player, and the company has some fairly unique traits that make it an exceptional business.
Brands such as ESPN, ABC, and Disney itself have established long-lasting emotional connections with consumers across different generations. The company owns the intellectual rights to many of the most valuable franchises in the world, and it has both the creative talent and the marketing firepower to capitalize on those assets in a consistent and predictable way.
Disney has made a series of important acquisitions over the last decade. It paid $7.4 billion for Pixar in 2006, bought Marvel for $4.24 billion in 2009, and acquired Lucasfilm and the Star Wars franchise for $4.05 billion in 2012. These deals are paying off in spades, providing tons of valuable content that Disney monetizes via movies, television shows, merchandising, home entertainment, and amusement park attractions, among other possibilities.
And the best might be yet to come. Disney will launch the new Star Wars movie, The Force Awakens, in December; needless to say, this should be a major blockbuster. Along with the latest trilogy, the company is also working on three spinoffs. The Star Wars franchise is about much more than a single movie for Disney, and it could open the door to amazing growth opportunities.
In case you haven't heard, people all over the world are spending a growing share of their time and attention online, increasingly connected via multiple screens such as computers, smartphones, tablets, and smart TVs. This is particularly true among the young, a key demographic target group for many companies.
Advertisers are certainly taking notice of this trend, and advertising money is going in the same direction as consumers' eyeballs. Based on data from PricewaterhouseCoopers, the U.S. online advertising industry produced $49.45 billion in revenue during 2014, and this figure is expected to escalate to $83.89 billion by 2019. This would be a major milestone for online advertising, surpassing TV advertising for the first time in history.
No company is better positioned than Google to benefit from this trend. According to data from StatCounter, the online search giant owns over 90% of the global search market when including both desktop and mobile. Google also owns enormously valuable platforms and services such as its Android mobile operating system, YouTube, Gmail, Chrome, and Maps, among countless others.
A simple investment thesis can many times be powerful and effective: Online advertising is a remarkably promising business, and Google is the undisputed king in this area.
Starbucks is synonymous with coffee for many consumers. However, the business is about much more than espressos and lattes. Starbucks is all about the brand and the customer experience; this differentiates its product from the competition, meaning superior pricing power for Starbucks and an above-average profit margin for its investors.
CEO Howard Schultz is one of the most successful business leaders around; he has a deep understanding of the industry and its main success factors, as he has driven Starbucks from a small group of coffee stores in Seattle in the 1980s to a global emporium with over 22,000 stores in 67 countries and growing at full speed as of last quarter. According to management, Starbucks stores around the world receive over 80 million people per week.
Innovation is one of Starbucks' main strengths, and also a great tool to consolidate customer loyalty. The company gained over 1.3 million My Starbucks Rewards members last quarter, bringing the total member base to more than 10 million active members. Starbucks is processing over 20 million mobile payments a week, so the company certainly knows how to turn innovation into a superior experience for customers.
Management intends to deliver no less than 10% annual sales growth over the coming five years, along with yearly earnings per share expansion of 15% to 20%. While this is an ambitious target, it does not sound too optimistic for a top-quality business like Starbucks.