Disney (Recovery at its finest)
During the pandemic, no company was as hard hit as the media & content powerhouse of Disney. The company operates in a ton of different businesses - Cruises, Theme Parks, TV & Cable, Merchandising, Cinematic Releases & arguably most importantly, video streaming. The House of Mouse owns basically anything that you can think of that is important content: Marvel, Star Wars, 21st Century Fox, National Geographic, Pixar… This special market position is what allows them to charge premium pricing in most of their businesses. Unfortunately, the Covid pandemic shut down most of their in-person businesses & thus, their most profitable segments. On the flip side, this means that in the coming months & years, the profits that they generated in the past are likely to return.
Most important however for the investment thesis is, of course, their streaming service Disney+. Their traditional cable business is dying along with the rest of the industry, as is the traditional movie watching experience. This means that the company is in dire need of another way to distribute their content offerings in order to maintain their competitive advantage. As we know, the most important thing about a business is their moat & how well they can monetize a sustainable offering. Of course, developing & owning some of the most beloved brands of all time is an irreplaceable advantage. In addition, their theme parks & cruise ships require substantial capital investment to make them viable. Overall, if the streaming service is proven effective, their overall market position should continue to be unassailable.
Last year, in the heat of Covid, Disney decided to abandon its historical dividend. Although this was a cost cutting measure, it also illustrated a marked shift in the company’s strategy - it was to become a streaming growth stock. Currently Disney+ has 118 million subscribers (including Hotstar), however, Disney also owns other streaming services - most importantly Hulu (including SVOD), and ESPN+. Combined the company has close to 180 million combined subscribers. Their ARPU (Average Revenue Per User) varies wildly from $4.12/month, to $85/month, depending on the service. In comparison, Netflix, which boasts almost the same valuation as Disney, has 214 million subs, with an ARPU of $14-15. Now, of course, for now, Netflix has the decided upper hand, with a much large content library & a more cemented market position. However, Disney has shown that it can produce quality shows (like Loki, WandaVision or the Mandalorian), along with the ability to monetize its absolutely massive content lineup. As time goes on, and they add more and more exclusive A-list content, I believe it is quite likely that they will be able to begin matching Netflix both on subscriber numbers and ARPU. This prediction is confirmed by the executives at the company who expect to hit 230-260 million disney+, and 300-350 million total subs by the end of 2024. This growth is expected to result from a combination of renewed Disney content offerings and substantial growth in the online sports streaming market - where they are poised to have a commanding lead through the premier ESPN brand.
In terms of their other businesses, it is quite likely that not only will they be able to return to par, but increase their profits. One excellent illustration is their new Genie+ service. Allowing you to personalize your day, skip lines & have a better experience at the parks, the new service at $15/day is being picked up by over a third of visitors, a number that is poised to increase. Overall, this service is increasing profit margins and reducing friction at parks. Overall, it is a good sign of things to come for the traditional business.
As we have established that the company is exceptional, we need to talk about valuation. After all, a company can be excellent, but if you pay too much, it’s not worth anything. Disney trades at a 33 f p/e, which is a pretty rich valuation for a company forecasting only 12% sales growth next year. However, what’s important to note is the need for a long-term horizon. If you believe that profits in their parks & other businesses will return, or be at least 10% below their previous amounts (based on the decline of linear TV…), they will generate 10-11 Billion dollars/year in the future. If you give Disney+ a value that is half of Netflix today - that would give the rest of Disney a 140 Billion dollar valuation (or a 12-13 f p/e). Overall, this would seriously undervalue the potential of Disney+ as a service, but also provide a reasonable valuation for the safe behemoth that is the traditional consumer segment.
At the end of the day, the picture for Disney as a whole comes down to your belief in their streaming initiative. Should Disney+ and the related streaming services compare to Netflix in valuation 4-5 years down the road (something that I think is quite likely based on the potential of Disney’s premium & local content), then you are looking at potential 15-20% annual returns for the next 5 years - a serious outperformance of the market. If however, you think Disney is likely to remain in its current position as a competitor but very clear number 2 position, then you should likely stay away from the company. In my opinion, this is an excellent opportunity to pick up shares of a blue chip giant with a serious long-term growth runway at a reasonable price after its massive drop off of streaming pessimism from one bad quarter.
Lockheed Martin (The Best Defensive Play - Literally!)
When we think of the US government, we think of the military. And that association is exactly what I’m banking on with this stock. The United States will always be in some form of war, and even when they’re not in a physical one, they are in a “cold” one. This new upcoming cold war with China will drive military returns for years to come, and the new military standoff with Russia is likely to spur even more interest. Additionally, this is likely to continue to drive growth in Lockheed’s diversified business models, primarily in the modernization space, with the US and others wanting to modernize their air fleets & purchasing more F-35’s. Additionally, their air systems, rockets & space programs should be key growth drivers for years to come.
Lockheed Martin has always been the Capitol's favourite producer, with other programs like the Sikorsky Helicopters, THAAD missiles & its newer contributions from the hypersonics program. Overall, Lockheed is a diversified military products provider, and should benefit from the long-term conflicts arising between the East & West.
Essentially, the company is a simple “defensive” play, best-in-class for the military industry due to its diversification, and offers relatively stable growth. They are likely to continue to grow revenues between 3 and 5% over the next 5-10 years, and in general offer the closest thing you can get to investing directly into the US government, but with a growth rate and a 3.25% dividend yield to go along with it.
Overall, the company surprisingly also has the lowest valuation of any of its military competitors:
LMT: 12.5 f p/e, 3-5% growth rate
NOC: 13.5 f p/e, lower growth rate (negative this year and growing 5% next)
GD: 15-16 f p/e, same growth as LMT
Lockheed also has the largest dividend.
Ultimately, this is a stable investment, where you can park your money with the expectation of receiving stable predictable income, while also retaining the potential for share price appreciation - if you ever thought of investing in Treasury Bonds (1.5%), invest in Lockheed Martin instead!
By: Mateo Gjinali
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