More Mouse, Please

This is just a quick note to let the Irregulars know that I’ve added to my holdings in Walt Disney (DIS) after their somewhat tepid quarter and negative investor reaction. I still consider this to be an extremely high quality franchise — the worries about relative weakness in the media networks, particularly ESPN (which typically generates 40% of profits) are real, and they should be considered as risks, but I consider it to be a “risk of slow decline” not a “risk of immediate erosion”. The cable bundle is likely to slowly go away, but the owner of the most powerful brands and the most-demanded networks is not going to be left penniless on the street in whatever the next era of home TV entertainment might be, Disney is in a very strong position and I expect they’ll remain strong.

There’s no real change to my assessment after the most recent quarter, I just find the price relatively appealing compared to other opportunities, so I’ve doubled what was a very small DIS position. It’s still not a major holding for me, but it’s getting bigger and I’d be willing to buy more as opportunities present themselves. The incredible strength of their entertainment brands, the utter dominance in films, and the growth in theme parks, including what will gradually become a massive park in Shanghai (though it won’t be profitable for a while), give so much opportunity for cross-pollinating their dominant brands (from Pixar to Marvel to Star Wars) that I think betting against Disney for the long term will be a mistake.

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That doesn’t mean the stock is cheap. It isn’t, and it hasn’t ever been in the past five years or so — but they have a fantastic balance sheet, great free cash flow of close to $7 billion a year that gives them lots of options for funding growth, and they’re priced at a discount on trailing earnings (18X trailing 12 month earnings, versus 23X for the S&P 500) and have almost exactly the same forward estimated PE as the S&P 500 (both are around 17X next year’s earnings). On a relative basis, I think Disney is far better than average and is likely to grow earnings at a moderate pace and earn a better-than-average PE multiple in the years to come — they’ll still get hurt if the market crashes, ...

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