The Walt Disney Company is the largest entertainment and media company in the world at the time of writing. It has a market capitalisation only slightly higher than the sector high flier – Netflix.
Charlie Munger shared four criteria he and Warren Buffett use to evaluate an investment opportunity. Find the full interview here.
Charlie is highlighting the importance of a defined process and set of investment criteria to aide clear investment decision making. These criteria help identify opportunities that fit, and those opportunities that do not fit, within your circle of competence. At AXIAM our criteria are as follows:
- 1. Companies that have Brands within the Top 100 Brands in the world.
- 2. Key Performance Indicators we can understand.
- 3. Free cash flow that allows us to determine the value of the company.
- 4. Low debt-to-equity.
Measuring Disney against those criteria is easy.
Disney is the world’s 19th most valuable brand and the world’s most valuable entertainment brand in the BrandZ Global 2018 rankings.
Disney is understandable
Disney creates stories and characters that consumers pay money to see and experience. Whether you are watching the latest Star Wars film in the cinema, watching ESPN sports on cable TV or experiencing a Disney Theme Park or a Disney cruise, you are paying Disney to be entertained. Disney owns the most valuable entertainment assets in the world.
They have significantly boosted their already formidable content assets following the successful acquisition of 21st Century Fox.
Disney’s “MagicBand” is also enhancing the Disney Theme Park experience. The wristband provides the wearer access to everything Disney – from a hotel room, to purchases to access memories on their cloud platform. Disney’s first theme park and resort recently opened in Mainland China, the Shanghai Disney Resort (in the photograph above).
Disney is sensibly priced based on its free cash flow
Disney’s operations produced about $12,3 billion in cash for the year ending the 30 September 2017. The company used $9,3 billion in cash to repurchase shares and paid over $2,4 billion in dividends. Disney demonstrated a commitment to return cash to shareholders.
By comparison, Netflix produced negative cash flow of -$1,785 billion. Netflix has a high price and negative cash flow while Disney’s price is more reasonable considering its proven ability to generate cash.
At AXIAM we focus on a long-term investment strategy built on 11 Investment Principles gleaned from the world’s great investors like Warren Buffett, Howard Marks and Charlie Munger. Contact our fund managers or sign up for our newsletter if you would like to learn more about investing your capital to provide ongoing retirement income.