Let's talk about Disney (DIS).
Last night, the company issued a quarterly report showing earnings that were much better than expected. To quote CEO Bob Iger, "I am thrilled to announce that our 1Q1 performance was the greatest single quarter in the history of the Walt Disney Company, and a phenomenal start to fiscal year '16."
Iger went on to say, "Revenue was up 14%, net income was up 32% and adjusted earnings per share were up 28% to $1.63, which is our highest quarterly EPS ever and is also our 10th consecutive quarter of double-digit EPS growth." What did these results show? Again in Iger's words: The long-term strategic focus and investment in brands are driving remarkable value in these businesses, and the company is "fully leveraging these assets across our portfolio of businesses and around the globe."
So with all of that good news, how much do you think the stock advanced? How about nothing. How about it declined $3.47! How about it hit a 52-week low of $86 at one point today, down an astounding 36 points from its high.
How the heck is this possible? How can a stock like Clorox (CLX) with incredibly meager growth sell at 26x earnings and Disney now be selling at 15x earnings, less than the average stock? How does Hormel (HRL), the marker of Spam, sell literally at twice the price to earnings multiple of this amazing entertainment company?
The answer, on Wall Street, is simple. Lots of Disney's growth has come from ESPN, and even as Iger tells us 95% of Americans with a multichannel bundle watched sports and 81% of those viewers watched ESPN, and across all platforms more than 200 million adults engage with ESPN, the fact is ESPN doesn't have as many people watching it over cable as it used to, and that, and nothing else, is all the analysts care about.
And when I say all they care about, all you have to do is listen to the questions after the executives speak and you will learn more about what this "community" of people cares about, and therefore the direction the stock is going to go, than anything management might tell you. Almost nothing else mattered about Disney, not the hit Star Wars, not the sequels to Frozen, not the merchandise, not Pirates or any more of the multibillion-dollar franchises, and not Shanghai Disney or the packed theme parks.
In fact, it got so bad that a respected analyst on the call actually asked Iger if he would ever split the non-media side of Disney from the media network side to bring out value. That's right: Put cable and broadcast on one side and the studio, parks, consumer products and interactive on the other. I almost fell out of my chair.
Iger was too restrained. Al he said was, "I'm not going to talk about separating those assets." He explained how the intellectual property naturally flows across all platforms and that the virtue of Disney has to do with that integration. Given that Iger and I share a birthday, I actually felt for the old guy who looks a lot younger than I am even though he's from an older vintage. That said, I don't know how I would have restrained myself from hanging up the phone or throwing it at the wall or whatever, and I am now in my elder-statesman phase.
I have to tell you, when I was a hedge fund manager, I think I, too, would have pronounced Disney dead. Why not? Iger talked about a recent uptick in subscribers, but it wasn't even in the quarter. I would have laughed at that. I would have thought all of this babble about Frozen the play, and the Star Wars video games and the Disney Cruise records are just dodges for hiding the real flaw of the company -- the rise and now tragic fall of ESPN.
I would have thought back then that Iger would have accepted his defeat gracefully and not talk about the future because ESPN is all that matters. Read Mickey Mouse's obit, will you, Bob? I mean, get a grip.
But I am not a hedge fund manager anymore. I am a guy who tries to think long term and wants to recognize long-term value. Absolutely it is true that ESPN is slowing, and I know it's real important to the story for 2016. I know people just aren't watching entertainment the way they used to and that the ad money and eyeballs are going toward Facebook (FB) and Google (GOOGL), not ABC and ESPN. I accept the fate, the judgment of the sellers as being more powerful than the buyers. (Facebook and Google are part of TheStreet's Action Alerts PLUS portfolio.)
But, when I think how many times this company has been written off, whether it because of the bombs of John Carter and Tron, which meant the sunsetting of the movie studio. Whether it be the eclipsing of ABC and its two other rivals, NBC and CBS, by a plethora of other channels. Whether it be the tired nature of the theme parks that were all played out with nothing new under the sun. I even remember when I thought the whole company was going to collapse during the previous CEO's tumultuous regime.
But each time the company reinvented itself, whether it be the buy of Pixar or of Marvel or now the Star Wars franchise. Whether it be the rise of ESPN. Or the expansion of the theme parks and the leveraging of the intellectual property that some analysts now want separated from the whole.
In other words, when you have the capital that Disney has, when you have the cash flow it has, when you have the reputation it has, you have the ability to reinvent again even if ESPN is falling off a cliff. Which it isn't.
In my old hedge fund world, all that mattered was the next quarter and maybe the quarter after that. If there really isn't an uptick in subs and some slowing of the degradation of ESPN, then maybe the stock goes still lower. Why not? All that has happened is that the stock's declined back to where it was a couple of years ago during the halcyon ESPN days before programming got too expensive and when the "skinny bundle" and "over the top" meant when you had lost a lot of weight or left the trench during the first disastrous day at the Battle of the Somme. So why not short it until the cows come home?
I have no answer short term. ESPN is too expensive for many to afford. Those fees to you are going to have to come down. There are too many different ways to watch that aren't as lucrative for the company .There are too many ESPN derivatives we don't need. There are too many big sports contracts that they paid out lots for.
But the stock has already come down huge from its high. It did get great value from Pixar and Marvel and Star Wars and there could be others down the pike. More important, maybe there's something else out there that can eventually replace the stream that is ESPN or the stream that was ABC or the stream that was Snow White or Mickey Mouse or so many of the other characters.
I don't know where it stops going down. It doesn't have much yield protection, but it could increase its payout radically and become a high yielder with no problem. I don't know how much its earnings are going to be hurt when it can't get all that money per ESPN subscriber.
But I know this: At a certain point, maybe it's 10 from here, or even 20, the stock will be trading as if it is a big, dumb cyclical rather than a company of fabulous brands like Procter & Gamble (PG) or Colgate (CL) except with a whole lot of growth vs. those packaged-goods companies.
How can you risk buying it? Simple: You don't have investors like I did at my hedge fund calling me every day after the close asking me how I could be so stupid as to own Disney. You don't have to worry about how the next quarter could be disappointing because you are thinking about the next year or two.
In other words, here's the bottom line: You can short Disney until the cows come home if you are a hedge fund manager and you may still make some money even though I would argue that the ride from $122 to $86 was the real payday. Or you can acknowledge that the cows do eventually come home and when they do you want to own it.
Somewhere between here and probably about $60, where it could have 3% yield if it keeps raising its dividend as it has, you have a real good investment. Notice I didn't say trade. I said investment. And that's what matters for you at home, not the next 2 million or 4 million or even 10 million lost subs and the remainder who are paying less than they do now. Yep, long term this one's going higher.
Oops, I forgot, what a doddering 61-year-old fool I am. Who the heck cares about the long term?