Disney Investment Thesis 07/23

Published on 07/18/23 | Saurav Sen | 5,340 Words

The BuyGist:

  • This is a deep-dive, long-form investment thesis. While we don’t exactly recommend this for light weekend reading, it is full of facts, charts, nuanced analysis, and actionable insights, with a splash of corny humor.
  • We’re doing this because we hold DIS in our portfolio.
  • We revisited our old Disney Thesis, now armed with our new, powerful valuation tool: The Buycaster.
  • Unfortunately, The Buycaster disapproves of DIS. Womp.
  • We figured out why: The Buycaster doesn’t automatically give the benefit of the doubt regarding cost-cuts or dramatic cost structure changes. It errs on the side of conservatism.
  • But new CEO Iger’s plan promises a few sweeping changes. So, it’s his word vs. The Buycaster’s. Iger has the advantage of experience.
  • So, we peeled open the Buycaster and played with some sceanrios by digging into segment revenues, costs, margins, and played with some sceanrios.
  • The scenario analysis led us to answer the question: what do we need to believe about the future of Disney+ to keep holding DIS?

Subjective overwrite.

We rely heavily on our primary in-house stock evaluation & rating tool: The Buycaster. It keeps us centered, and steers us away from speculative buys. With the Buycaster, we’ll never overpay for a stock again. Sometimes, however, we run into a conundrum when the Buycaster gives an awfully low rating to a portfolio holding that is going through a business transition. In that case, a conservative valuation based on the company’s recent business economics may not be accurate or even useful. When we run into this conundrum, we need to peel open the Buycaster, and adjust for that transition. It ends up being a tango between the subjective and the quantifiable. Usually, the subjective overwrites the latter, as it should in the world of investing. That was true in Disney’s case as well when we dug into it last time. And here we are digging into it again in July 2023. Why?

We’re current holders of DIS, but the Buycaster disapproves of it. So, we’re asking ourselves: should we keep holding DIS? Here’s a sceenshot (along with its explanation below):

Explanation from the Buycaster:

DIS has a LOW Buycaster Rating, which tells us that it is IRRATIONAL to expect the stock to deliver 80% cumulative return in 5 years (12.5% CAGR). The current stock price is just too high to deliver that return in the next 5 years - given the economics (past, present, and most likely the future) of the company. To consider buying the stock, we would need to believe that The Walt Disney Company's business economics – revenue growth, cost structure, and profit margins – will improve drastically over the next 3 to 5 years. Without a high degree of confidence in such a drastic transformation, we would sell DIS if we held it in our portfolio. In the charts below, we do quantify 'what we need to believe' to (rationally) expect DIS to deliver 80% cumulative return in 5 years (12.5% CAGR).

The Buycaster is a sophisticated stock valuation and rating system. There’s a lot that goes on behind the scenes to distill all that data and information down to a single, succinct rating. So, in the sections below, we will go behind the scenes to map our subjective views on to specific cash flow assumptions that finally lead up to a revised Buycaster rating. And then we make a subjective call on which Buycaster Rating to believe. As always, our deep-dives end with a very specific conclusion: Buy, Hold or Sell (we don’t do research just to ruminate and hedge our opinions).

We should be clear: In this thesis, we’re not going to dig into Disney’s Competitive Advantage and Economic Moat. Nothing much has changed on that front since our last thesis. Disney is still a very strong franchise, with very high barriers to entry. But the market has changed. Management has changed. Strategy has changed. So, it’s time to dig into Disney again.

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