*This content is supplied by Ranmore Global
Written by Sean Peche, Ranmore Global Portfolio Manager*
First appeared on LinkedIn
Disney hit the lowest price in a year – down 59% since March ’21.
How?
Isn’t it a “great business” with “excellent management”?
I thought “great businesses” meant “great share prices”
Nope.
But their parks & ships must be pumping with post-COVID vacations. Disney+ has over 100m subs and owns the best sports content on ESPN.
But we already KNOW that.
The flip side is streaming competition is rife, parks have high labour costs & sports rights will cost more in the future with Amazon joining the party.
Things change.
And that’s precisely why we’re not in the “buy a great business and hold forever” camp.
Is it that easy?
I know it SEEMs easy because we look at Apple & think, “Grrr, I love my iPhone; all I had to do was buy the shares & hold them forever”.
But we’d be fooling ourselves because we only see survivors.
It wouldn’t have worked if you’d applied that strategy to Nokia – the early smartphone leader:
Or to Intel, the semiconductor heavyweight champ pre-Nvidia;
Or Xerox;
Or Kmart;
Or Avon Products.
They were all considered “great businesses” once upon a time.
But things change.
New competitors come along; economies, management, and valuations change.
And we need to be alive to those changes – that’s why active management makes sense.
And why “low turnover” may be the reddest of all herrings.
Maybe the “buy and never sell” teams are secretly hoping their clients apply that strategy to their funds and never sell
An excellent way to afford that Chateau in the French countryside.
Speaking of castles,
When the world knows it’s a great business with a wide moat, it’s often already in the price.
How much would the landed gentry have paid for a castle on a hill with a wide moat back in time?
Probably any price – their lives were at stake.
But castles still got stormed because enemies would:
fill in the moats or;
drain them or;
launch fireballs over the walls or;
Do a stakeout & wait until the castle inhabitants were starving to death and surrendered.
Sure, moats slowed down the speed of attack, but they were all stormed sooner or later.
Disney’s peak free cash flow was $8.3bn in 2017, when “we” all wanted superhero movies.
Other than Value managers who don’t like “fantasy”.
But Disney has only managed free cash flow (FCF) of $3bn over the past year:
Netflix has generated $4bn;
Comcast $12bn.
So how much would you pay for peak FCF of $8bn?
Assuming you received it all in cash dividends & management keeps a lid on Share-Based Comp?
I know it’s more fantasy … but have a heart; it was “only” $1bn last year, doubling in 2 years.
If only profits grew as fast…
Would you pay $200bn = a 4% yield on their EV?
Considering they’re nowhere near generating $8bn.
Me neither
So, I think I’ll sit this one out & and watch the battle from the sidelines.
Although it might take some time, $1bn in annual comp means the inhabitants won’t be starving soon.
Disclaimer:
- Read more: Numbers, not the narrative – Sean Peche
