For my series, "The Forever Holds," I'll comb through the entire stock market looking for stocks you can literally hold forever. Well, maybe not forever, but for at least 30 years. I am doing this for a few reasons. The concept of the Forever Hold came to me when a friend's grandfather passed away, and she inherited her ancestor's assets. There were a few stocks in the portfolio that had been purchased in the 1950s and, after multiple splits, had cost bases of pennies a share. Despite 60 years of market turmoil, and even the financial crisis, all of these stocks had returned multiples of their original investment.
Yet not all stocks will behave like this. All of these stocks had certain things in common. They all produced products that somehow are wrapped up in human DNA. They are each an intrinsic part of our daily lives, all across the globe. The fact that they withstood the devastating market of the 1970s, the dot-com bubble and the financial crisis speaks to their durability. I literally want a portfolio that I can feel is purchased with the intent to pass on to my kids and to their kids.
So, is Walt Disney Co. (NYSE:DIS) a Forever Hold?
1) Is it intrinsic to everyday life? Borderline "yes." There was a time when I would have said that the entertainment assets Disney has weren't woven into our DNA. But with the proliferation of the internet and mobile devices, entertainment is now literally everywhere, whenever you want it. Disney's assets are so diversified that they are impacting at least some people, somewhere, at all times of the day. They own movies, TV stations, TV shows, radio networks, radio shows, ESPN, ABC, Disney cable channels, theme parks, resorts, cruise lines, restaurants, music, stage plays, tons of licensed products like their characters, toys, games, online content and games, mobile games, video games, and loads of other consumer products.
2) Is it a global brand? Yes. You can't go to Sri Lanka without someone there knowing who Mickey Mouse is…and every other Disney character.
3) Is there room to grow? Heck, yes! The beauty of being a content creator and distributor is that there is an infinite well of creativity to mine to fill current distribution channels. With mobile and internet platforms, there are literally no physical limitations to how Disney content is consumed. Every new generation is introduced to Disney almost as if it is a religion. For every child born, particularly in developed countries, Disney stuffed toys will be thrust into their hands.
4) Are the financials truly outstanding? Yes. The company sits on $4.37 billion in cash, $2.4 billion in long term investments, $12 billion in low cost debt, and $4.6 billion in TTM FCF. The company is a cash flow monster.
5) What about 30 years from now? Disney is so entrenched as a brand name, with such brand recognition, that it will always be a part of the human experience. Content creation will never cease, and Disney has proven it can stay on top of emerging technologies.
What about competitors? Time Warner (NYSE:TWX) is a fine company with plenty of great assets, including movies, HBO, Cinemax, TNT, and publishing assets. However, it has $20 billion in debt and while it has terrific cash flow, it isn't as robust as Disney's. News Corp. (NASDAQ:NWS) also is a global asset holder, but it isn't diversified as much, and is too exposed in the area of newspapers, which are a dying industry. Viacom (NASDAQ:VIA) is loaded with television and film assets but does not have anywhere near the diversity that Disney does in all the other entertainment areas.
Furthermore, Disney is childhood and childhood is Disney. You can't say the same about any of these others.
If we put a 13.5 P/E on Disney to account for analysts' 5-year growth rate plus dividend, and attach it to 2017 earnings estimates of $5.82, and add in a 10% premium given its brand name and cash flow, we get a 2017 fair value of $87. With Disney at $52, this is a bargain. It's also a Forever Hold.