DISNEY: What If You Could Buy Coca-Cola Together With Buffett In 1988? (Part II)

$DIS is trading at 20x Parks EBIT (ex-Media) ALONE. How is Parks EBIT still growing at 16% CAGR? Pricing Power. And is Streaming at an inflection point to turn into a "Profitable Growth" business?

This is the Disney Part 2 report. Click here to read Disney Part 1 — IGER: Post-Cable Malone.

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Many value investors have come to worship the ground that Buffett walks on for his keen aptitude to spot ‘wonderful businesses at fair prices’. However, hindsight is 20/20 — and few investors today recognize that many of his major heists were acquired in times of great distress. Examples of some of these famous steals include:

• American Express in 1963 (acquired amidst the infamous Salad Oil Scandal);

• GEICO in 1976 (acquired on the brink of bankruptcy);

• Coca-Cola in 1988 (acquired following lackluster diversification efforts and amidst the stock market crash of 1987);

• Wells Fargo in 1990 (acquired amidst the banking panic following the 1990 Californian earthquake),

• Apple in 2016 (first stake acquired amidst growth concerns following saturation of the China iPhone market)

Notably, all of these investments were made during times when nobody wanted them — that’s how Buffett scored them at points of maximum pessimism. With the benefit of hindsight, we can look back and say that they eventually became wonderful businesses; and perhaps we can even say that Buffett had the foresight to recognize that they were wonderful businesses even amidst their downturns.

But one undeniable fact is that at the time of Buffett’s investments, the vast majority of stock market investors did not think that they were wonderful businesses; otherwise they wouldn’t have been giving him such bargains in public stock markets. The correct interpretation of this is that all of the above examples looked like absolute dogs to the vast majority of market participants at the time when Buffett was excitedly pouring into them — this is evidently detailed in Yefei’s Lu excellent coverage of the thought process behind Buffett’s pillar investments in his book Inside The Investments of Warren Buffett: 20 Cases.

This is also how I see Disney today — its standing today bears remarkable similarities to how Buffett might have seen Coca-Cola in 1988. The company’s Media business is most certainly facing some challenging headwinds, and there is outsized uncertainty regarding the future of its Linear TV business and ESPN’s transition to DTC. Compounding the anxiety is the overexpansion of its DTC business (Disney+) under former CEO Chapek, in his pursuit for “growth at all costs” (i.e. Quantity). This is nostalgic of how Coca-Cola was an underperforming conglomerate in the years prior to Buffett’s entry, after having overexpanded into a myriad of poor businesses (it even owned Columbia Pictures at one point) — a far cry from the incredible business economics that KO 0.00%↑ is known for today.

However, IMHO markets today are completely mispricing the perpetual Brand Value (i.e. Quality) of Disney’s Intangible Assets (its beloved entertainment IP, e.g. Mickey Mouse, Iron Man, Luke Skywalker) with generational pricing power — in the same way that markets completely mispriced the powerful international expansion capacity lying dormant behind the global Coca-Cola brand in 1988. This is coming at around the same time that Streaming is just starting to enable the economic feasibility of global expansion for the US Media companies, perhaps beginning a new chapter of international revenue growth which wasn’t possible before — just like Coca-Cola’s hidden potential when Buffett first invested in it.

Finally, Iger’s indications towards lowering output, refocusing on quality (ROIC), and returning Disney to creative excellence (lost during the Chapek days) bears all the same hallmarks as KO 0.00%↑ in 1988 — when Buffett insisted that it exit all its unrelated businesses rather than continue the pyrrhic war it was waging against PepsiCo at the time for domestic market share in the wider fast food FMCG space; and refocus all its efforts instead into growing its premium soda brand internationally to become the single-product consumer brand titan with unassailable global mindshare that it is today.

With Disney+ engaging in Rebundling and the rest of the legacy media companies likely retreating to an MVPD arrangement due to losing the Streaming wars (ala Warner Bros’ recent syndication of DC shows to Netflix), there is overwhelming evidence that the natural trajectory of the modern-day Streaming sector will culminate in the wonderful “Aggregator” moats of the legacy Cable industry — and that the US Media industry is likely to consolidate into a duopoly, thrusting market share into the hands of the two sector incumbents — Netflix and Disney+. While still far from guaranteed at this point, there is certainly room to make the argument that Netflix along with Disney+ could together end up commanding 50-60% of industry market share over the long-term — with everyone else fighting for scraps over the remainder. That is how dominant the nature of Disney’s moats are in the US Media industry.

This is why I believe that when Iger steps down upon his contract expiring in end-2026, he will have a chance at dethroning John Malone for the title of Cable Cowboy. Hence the title of my preceding Disney Part 1 report:

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    I want to give a huge shoutout to Alex from The Science of Hitting Substack (TSOH), who very graciously allowed me to lean on his research while analyzing Disney. His incredibly detailed insights into Disney were extremely helpful, and I will be generously linking back to his articles throughout my reports. I consider TSOH as the premier investment newsletter for Big Tech on Substack; in the same way that I consider SemiAnalysis for Semiconductors. Please show your support to his newsletter by visiting it at the link above.

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Why Disney Successfully Transitioned to DTC Where Everyone Else Failed

1. Lower DTC ARPUs vs Cable

2. Sports Media Broadcast Rights

3. Transitioning to DTC is Expensive

This section will build on the business model context that we discussed in Part 1. Given what we’ve learned there about Disney’s business model, the history of the US Media industry and its natural future trajectory, we are now well equipped to tackle the Disney-specific context and its current developments at light speed.

The path of least resistance for the Streaming industry is a consolidation of the entire industry around just two players, Netflix and Disney. This path of least resistance exists for several reasons, which we’ve partially explored it Part 1 as well: