Disney’s Amazing Purchase

I find it hard to fathom that an idea in someone’s mind could blossom into a business empire spanning more than 4 decades. That idea of a quirky universe filled with 17000 characters and a few thousand planets was borne out of the legendary film maker’s mind, George Lucas. Like Harry Porter, its success would be considered by any means a positive black swan.

George Lucas’s Big Bet

At a point in time when movie executives did not believe in the power of the franchise and its characters, George Lucas took a bet, and a big one at that . In 1973, instead of a pay raise offered to him, he opted to receive $50,000 and all the rights to all the sequels of star wars plus all the rights to the merchandising.

What fascinates me about George Lucas was that he wasn’t in it for the money. He was thinking about protecting the creative integrity of his project from what I believe. As I read these articles about George Lucas, it sure reminds me of the “why” that one should stay true to himself and not be a follower merely another has attained success in a particular way. Those values sure do speak to me as a person, as an investor.

Back to George Lucas. Those decisions made a huge dent to his life. As the franchise of star wars grew exponentially, so did the sale of merchandise, earning George Lucas hundreds of millions of dollars. The moral of this short story so far is thus this : Stay true to yourself and express yourself honestly.

I could name many more folks who stayed true to themselves. JK Rowling, Paulo Coelho, Warren Buffet(since this is an investing blog), Bruce Lee ,Elon Musk and many more. I mean look at Elon Musk! Who would have thought electric cars would be on our roads today. Another positive black swan event perhaps! These individuals achieved a vibe, an aura about them that projects their entire consciousness to the universe.

I have to say at this point that I am not a fan of star wars by any means. But I do watch it because my family watches it. It is very much a family event where all 3 generations can get together and enjoy the movie over a popcorn combo. And of course most of us grew up with the movie as it evolved with its characters.  In a sense, watching star wars movies have become a sort of a habit. If you watched it in the 70’s and the 80’s, you gotta watch it today.

And of course. What I wanted to talk about was the managerial brilliance of Bob Iger, who took over as Disney CEO in 2005. We are currently witnesses to the vision of this man being played out.

Disney Acquisitions

These are some of the acquisitions that have taken place under the helm of Bob Iger.

  • In 2006, Walt Disney purchased Pixar Animation Studios which cost $7.4 billion.
  • In 2009, Marvel Entertainment was purchased by Walt Disney which cost $4 billion.
  • And in 2012, the entire star wars franchise(Lucas Films Ltd) was purchased at a price of $4.05 billion.

According to my understanding of things, the purchase prices of these entities are fairly undervalued prices with the exception of Pixar Animation Studios. ( I am unsure if Pixar was bought at the right price. This is subjective) But just think about  it for a moment, the movie “The  Avengers” grossed $1.52 billion alone. Just 1 single movie. Sure, Disney had to spend money to create the movie and only a fraction of that goes back to Disney. But overtime, these receipts will add up. If one were to discount the cashflows of Disney to the present day, what would its value be? This is of course a subjective exercise. I have my own ideas on it and I believe that at the right price, Disney is worth a real hard look.

And then there is  star wars. Rogue One drew $2.066 billion USD in box office receipts.  That is approximately half of the $4.05 billion price. Again, only a fraction of it goes back to the studios. But if Disney is able to replicate these successes, at the right price, it might be a home run we are talking about.

I mean just think about it for a moment. How many different spin offs of Star Wars and X-Men could Disney produce? How far are they able to take these characters, these make believe universes and more? The answer is that is that they can only be constrained by creativity. And creativity as we know it, has no limits! This reminds me of what Einstein said about creativity. “Imagination is everything. It is the preview of life’s coming attractions.” And do note that we are not talking about movies here, we are also talking about ticket sales to Disney for its attractions related to the Stars Wars theme and the sales of merchandise and more.

Profitability & Dividends

Let us look at something more tangible though. The income statement of Disney. I am not going to go down the rabbit hole on this one. But perhaps, just a cursary glance of its numbers would prove my point above.

The net income has really made a march from 2009 . And that net income has doubled from 2007. The dividends paid have also increased in tandem.  Go figure the growth rate of this entity. Whip out your calculators and do some basic math.  The question of course is can Disney continue its upward march? This is a matter of judgment of course.

If you want to be in the game of investing, you would have to develop your own mental models to deal with this and figure out what is the right price to pay. Although there are several upgrades to the stock by analysts, my humble opinion is that this may not be the right price to buy it at. In my mind, as the investor in me kicks in, there’s just too many things that could go wrong that would make the purchase price expensive at this point in time. I don’t think Ben Graham is willing to purchase it at this price. The other thing is that managerial brilliance or the lack of it really does affect a company like Disney. Bob Iger, as I know it will retire in 2018.

Also, the return on equity figure has also increased from 14% to 21% from 2007 to 2017. That is pretty dramatic if I may  say.

Let us also look at the price of Disney from the point when Bob Iger took over as CEO.

It was around $26 in 2005. It is now a solid $110. Although it took some time for Iger’s vision to play out, it eventually did from around 2011 onwards.  I would say currently, the risk reward ratio is not attractive in the short run. But if one were able to assess the actions of management, which I believe is a real hard skill to acquire, the 2009 purchase of Marvel would have signaled that greater things were to come under the helm of Bob Iger and of course, the 2012 acquisition of George Lucas’s Lucas Films & all Star Wars related properties would have cemented that fact. In 2012, Disney could have been purchased at around $50 per share.

An astute investor would think of these corporate events(acquisitions) as milestones achieved by the CEO. Taking into account that the acquisition prices were reasonable, an astute investor would have bought some in 2009 when things became really cheap and then some more in 2012. Why? Think Kelly! As the odds of a gamble increase, it would pay for a gambler to put more into a bet. This, I am afraid, is another lengthy article altogether.

I leave this with you to ponder. When considering the purchase of Disney, think in terms of risk and reward in the short term as well as in the long term. And also the likelihood that earnings will continue to grow from now. Also, think in terms of the no brainer baseline price that you would pay, just in case, growth stagnates or even declines! This is more than enough to keep your week filled!

To all readers , may the force be with you!

 


kingsley

I have been an investor for 15 years now and my journey has meandered from Warren Buffett to Ben Graham. My start, like many, really was the naive idea that Buffett's skills could be replicated in some fashion. I was proven wrong when some of the supposed stock picks that I chose had dismal performances. Then, I learnt that it is no point trying to be someone I am not. Gradually, through failure and some success in deep value investing, my approach towards stocks gradually shifted to an approach based around Graham's techniques. So, I give credit where credit is due and to Ben Graham, I and many other investors around the world, owe him a great deal. So, if you want to read up on biographies, read about Ben Graham. His seminal work, Security Analysis is a gem. My books are just rich interpretations of what he has taught.

Leave a Reply