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Could Disney be the happiest stock in your portfolio?

Opdateret: 3. maj


Disney is one of the most recognized brands in the world. An investment in Disney will give you exposure to all kinds of different sectors, such as streaming, linear TV, movie studios, theme parks, hotels, and cruise lines. And there will likely be more to come. Many of the sectors that Disney operates in have struggled during the pandemic, so the question is if it is time to buy Disney now?


This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.


Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.


For full disclosure, I should mention that at the time of writing this analysis, I do not own shares in Disney. If you would like to know what I have in my portfolio, or you want to copy it, you can read how to do so here. I am a huge fan of the company, and I pretty much learned to read by reading Disney comics. I'm also a big fan of some of their franchises such as Star Wars, and I use Disney +. However, my experiences with the company will not be reflected in the analysis, as I will keep it unbiased.


Disney was founded in 1923 and is an American multinational entertainment and media conglomerate. They have activities in all sorts of different sectors such as streaming, TV stations, movie studios as well as theme parks, hotels, and cruises. As a result of their latest organizational change, Disney has divided their businesses into two segments: Disney Media and Entertainment Distribution and Disney Parks, Experiences and Products. Disney is known throughout the world for their characters such as Mickey Mouse and Donald Duck, as well as their movie franchises, in which the own the two most profitable franchises in Marvel and Star Wars. I believe that most people know Disney, which is why I won't to a long description of the company. As most people around the world knows Disney, it is quite obvious that Disney has a huge brand moat.

Their CEO is Bob Chapek. He joined Disney in 1993 and held many different positions until he became the CEO in 2020. He has a degree in microbiology from Indiana University Bloomington and an MBA from Michigan State University. It is safe to say that Bob Chapek haven't had an easy start as a CEO. Just after he became the CEO, the world was struck by a pandemic that caused the world to shut down and made Bob Chapek close their parks all over the world. His tenure as a CEO has also been surrounded by some controversy. Under his leadership Disney had a dispute with one of their stars in Scarlet Johansson, which is something that would probably never have happened under former CEO Bob Iger, as he always prioritized a good relationship with Hollywood. Furthermore, Bob Chapek is currently experiencing a PR nightmare due to his actions regarding the "Don't Say Gay" bill in Florida. I don't want to go into politics here but what happened is that Bob Chapek did not publicly criticize the bill to begin with. It resulted in his own employers criticizing him for not doing so, he later changed his mind, but the damage was already done. After he publicly criticized the bill, he is also being target by politicians and other supporters of the bill, and it seems difficult to find a way out. However, Bob Chapek also managed to keep Disney afloat during the pandemic, and in 2021 he managed to deliver the best quarters ever for the U.S. theme parks despite lower attendance. It was due to per capita spending in the parks being up more than 40 % compared to 2019. It is due to higher sales in food, beverages, merchandise, and the introduction of Genie+, which is a paid service that let you bypass the standby line on selected attractions. All in all, I don't think it would be fair to judge Bob Chapek already, but I do feel slightly concerned about his PR moving forward.


I believe that Disney has a huge brand moat. I'm not entirely confident about the management though. Now let us investigate the big five numbers to see if Disney does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.


The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all the benchmarks. Not exactly the numbers you want to see. Not only is the ROIC blow the 10 % in last benchmarks, but it is also decreasing year over year.



The next numbers we will investigate are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. Once again Disney underdelivers, they are far below the 10 % requirement in each of the benchmarks.



The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. These numbers are disastrous if you ignore all numbers except for the one in the last benchmark. If one is invested or plans to invest in Disney, you would hope that the last benchmark is the start of a new tendency when it comes to the EPS growth rate.



The Equity Growth Rate is also known as the most important of the four growth rates. Disney has delivered some solid numbers. They underdeliver in the latest benchmark but as it was still during the pandemic, I wouldn't give it too much importance. It is encouraging to see that not only did Disney deliver an equity growth rate above the requirements in the first four benchmarks, but it is also increasing from benchmark to benchmark.



Finally, we investigate the Cash Growth Rates. Once again, Disney underdelivers. Way under the requirements in all the benchmarks. At the same time, the cash growth rate decreases from benchmark to benchmark.



To shortly summarize the five numbers from Disney. The most important number is always the ROIC, and unfortunately the ROIC of Disney is underwhelming in the newest benchmarks, which is slightly concerning. Disney has delivered a very nice equity growth rate, which is the most important of the four growth rates. However, the sales growth rate is underwhelming, while the EPS growth rate until last year has been disastrous. The cash growth rate has been disastrous in all benchmarks. Nevertheless, it is important to remember that these numbers are historical and won't necessarily reflect the future. It means that you don't have to make investment decisions based on the historical numbers alone, they are just needed to give one some context.


Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculations on Disney, it shows an enormous debt that can be paid off in 24,33 years! The high debt is due to acquisitions. Especially the acquisition of 21st Century Fox, which is the largest acquisition ever for Disney. It went through in 2020 and did cost a whopping $71,3 billion. At least there is an explanation for the huge debt.


Like with all other companies, there are some risks you need to consider, if you are going to invest in Disney. A decline in economic activity. Lately, there has been a lot of talk about a recession in the United States. Past declines in the economic resulted in reduced spending in their parks and resorts, while it affected prices for advertising in their broadcast and cable networks. It could also result in fewer streaming subscriptions. Higher labor costs. We are seeing higher labor costs around the world, and if they continue to rise, it will hurt revenue for a company like Disney that employs 190.000 people. It isn't only salaries but also increases in something like health care would hurt revenue. High debt. The high debt that Disney has accumulated due to their acquisition of 21st Century Fox and because of the pandemic, could decrease business flexibility as there is a ceiling in how much debt the company can take. I don't think a company like Disney will go bankrupt but not being able to take on more debt could hurt future growth.


It isn't all risks, there are also a lot of potential for Disney moving forward. The end of the pandemic. As I wrote previously, Disney recorded record revenue from their theme parks in 2021. And it was done with primarily domestic visitors. Once the pandemic is over, they will also get international visitors, and international visitors usually stay longer and use more money. If they like the domestic visitor will increase spending by 40 %, it will be very good for both the top- and bottom line. Ending the pandemic will also be good for their cruises. Disney+ will be profitable. Right now, Disney+ is not profitable but management expect it to be profitable by fiscal 2024. Management has a plan to double the numbers of markets for Disney+. It is now available in 80 countries, and management expects to reach more than 160 countries by 2024. Furthermore, they are toying with the idea of making a new subscription that allows advertisement, which would be a cheaper option than the current subscription. It might help in keeping some of their customers that would have cancelled the subscription and attract new customers. New business ventures. In the latest earnings call, the management mentioned that they are looking into new business ventures, such as sports betting, gaming and the metaverse. I believe that sports betting could be interesting due to the synergies with ESPN+. The sports betting market is expected to grow by a 10,2 % CAGR until 2028, and it could be another revenue stream for Disney.



All right, we have gone through the numbers, potential and risks regarding Disney, and now it is time for us to calculate a price for Disney. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS at 5 (which is higher than the current one but slightly lower than in 2018 and 2019). I chose an Estimated future EPS growth rate of 15 (which is lower than what analysts expect but it is the highest I use), Estimated future PE 22,5 (it is the highest historical P/E) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $112,5, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Disney at price of $56,25 (or lower obviously), if we use the Margin of Safety price.


Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financials, keep in mind that all numbers are in millions. The operating Cash Flow last year was 5.567. The Capital Expenditures was 3.578. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 2.504,6 in our further calculations. The Tax Provision was 25. We have 1.820 outstanding shares. Hence, the calculation will be like this: (5.567 - 2.504,6 + 25) / 1.820 x 10 = $16,96 in TEN CAP price. However, last year could have been an outlier, so I also made the calculations from the year before (Disney's fiscal years ends in September), and I got a TEN CAP price at $33,23.


The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". The free cash flow per share last year was 5,10 but I don't believe that to be sustainable. Hence, I have decided to cut it to 4. With the Free Cash Flow Per Share at 4 and a growth rate of 15 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $59,99.


I believe that Disney is an interesting company due to their large moat. However, I also have some concerns regarding management. The historical numbers don't exactly give me confidence in Disney as an investment case either. There are some potentials for Disney moving forward but I believe that the company is expensive as it is now. Hence, I will not be opening a position in Disney for the time being.


My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.


I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.


Some of the greatest investors in the world believe in karma, and to receive, you will have to give (Warren Buffett and Mohnish Pabrai are great examples). If you appreciated my analysis and want to get some good karma, I would kindly ask you to donate a bit to the conservation of the snow leopard. This fantastic animal is in danger of getting extinct, and they need all the funds they get. If you have a little to spare, please donate to the snow leopard here. Even a little will make a huge difference to save these wonderful animals. Thank you.



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