As Walt Disney once said: “I never called my work an ‘art’. It’s part of show business, the business of building entertainment.”
Let’s hit on why we bought Disney (DIS).
Disney, through various acquisitions and creative developments over the years, has amassed a large portfolio of IPs. Some of the major ones include:
- Disney Animation and Film Properties: This includes classic and new Disney characters and movies, such as Mickey Mouse, Cinderella, Frozen, and Moana.
- Pixar: Known for hits like Toy Story, Finding Nemo, and Inside Out.
- Marvel Entertainment: This includes the vast array of Marvel Comics characters such as the Avengers, Spider-Man, X-Men, and many others.
- Star Wars: Acquired through the purchase of Lucasfilm. Use the force, Luke!
- 20th Century Fox: Acquired in 2019, this includes a wide range of film and TV properties like The Simpsons, Avatar, and the X-Men movies.
- ESPN: While primarily a sports broadcasting network, ESPN also holds a variety of sports-related IPs.
- ABC: Includes all television shows produced by the ABC television network.
- Disney Channel Properties: Includes TV shows and characters created for the Disney Channel, like High School Musical and Hannah Montana.
- National Geographic: Acquired as part of the 20th Century Fox deal, this includes all documentary and educational content under the National Geographic banner.
Disney can monetize these IPs in numerous ways:
- Film and Television Production: Direct revenue from box office sales, streaming rights, TV broadcasts, and DVD sales.
- Merchandising: Sales of toys, clothing, and other consumer products featuring Disney characters and brands.
- Theme Parks and Resorts: Attractions, hotels, and experiences based on Disney IPs, generating revenue through ticket sales, accommodations, and themed merchandise.
- Licensing and Franchising: Allowing third-party companies to use Disney IPs in their products, in exchange for licensing fees.
- Publishing: Books, comics, and magazines featuring Disney characters and stories.
- Video Games and Interactive Media: Video games and mobile apps based on Disney IPs.
- Theatrical Productions: Stage adaptations of popular Disney movies like “The Lion King” and “Frozen.”
- Music and Soundtracks: Revenue from the music produced for films and TV shows.
- Streaming Services: Subscription fees from Disney+ and other streaming platforms that feature Disney content.
- Brand Partnerships and Sponsorships: Collaborations with other brands for co-branded products, sponsorships, and advertising campaigns.
- Experiences and Exhibitions: Traveling exhibitions, interactive experiences, and educational programs based on Disney IPs.
Disney’s strategy involves cross-utilization of IPs across these various channels, often creating synergies that boost the overall value and revenue potential of their properties. For example, a successful movie can lead to increased theme park attendance, higher merchandise sales, and greater interest in video games or TV spin-offs related to that movie.
Frankly, I expect that Disney will end up spinning off/selling some of these assets in coming months and years and that the company won’t be letting those assets go cheaply. When we made our financial model for Disney using our proprietary WiNR Ratio algorithm, we find that Disney is trading for about 5 or 6 times its likely profits for 2028 even if it doesn’t spin off/sell any assets over the next four years. We expect that the stock would probably be trading at about 15x those profits in 2028 which would put the stock at more than $250 per share which would be a more than 30% annualized gain.
There’s certainly near-term risk as the company has struggled with their movie slate over the last year or so and needs to find a permanent CEO to lead the company into the future. Certainly some of that risk has been priced into the stock as it has come down nearly 60% over the last two years.
We are also trimming down our DallasNews Corporation (DALN) holdings. We’ve had a pretty nice move upward in the stock since we sent out our initial Trade Alert when the stock was at $4.18 in September 2023. We also received a $0.16/share dividend since then. We built this up to a medium-sized position in the hedge fund. As we are wanting to reduce some exposure to small-caps stocks going into 2024, we are trimming it down a bit here. The next ex-dividend date is February 8th and we are mostly keeping a chunk of stock steady until then and probably through the next quarterly earnings report.
DallasNews is still under the control of one of the founders’ descendants and we cannot force the company to do anything against that controlling shareholder’s will. We have a lot of ideas that we think can help the company restore growth and achieve profitability and we presented those to the company a few months ago when we met the CEO in Dallas, but the company is not terribly conducive to our becoming more involved. We will see how their efforts to turn the company around are coming along in the next quarterly update.
If we like what we hear in the next earnings report, we will probably continue to hold some shares and if not, we might decide to move on. The valuation is still pretty compelling given the company is trading at or close to its net cash balance and about 0.2x where its 2024 sales will likely be. However, management needs to make some changes to the company’s operating structure at some point in the next twelve months they truly intend to restore profitability.