This 'Forever Stock' Is Soaring
This 'forever stock' is soaring... Disney's transformation is officially underway... A big day for Stansberry Research readers...
We wrote it... Did you buy it?
A little more than a year ago, Porter introduced one of his highest-conviction ideas in years.
In short, he and analyst Alan Gula believed entertainment giant Disney (DIS) offered an exceptional opportunity for investors. As they wrote in the April 2018 issue of Stansberry's Investment Advisory...
Disney helps shape popular culture... And it gets paid for it. Its enduring characters are part of America's cultural heritage. Our kids, grandkids, and great-grandkids will watch Disney movies. They'll buy its content-branded merchandise and visit its theme parks.
Disney is one of the world's premier content and entertainment companies. And it plans to add to its already impressive collection of Trophy Assets with a blockbuster acquisition – its most transformative yet.
Best of all, we have a once-in-a-decade chance to buy Disney at a steep discount to the market.
In the issue, they called Disney a 'forever stock'...
It's a stock you could safely buy with up to 5% of your entire portfolio... and potentially hold for a lifetime.
This type of conviction is rare... But it was particularly noteworthy in this case.
You see, five months earlier, Porter and his research team had warned subscribers to avoid this stock. As they wrote in the December 2017 issue of Stansberry's Investment Advisory...
[Disney] has a strong brand. Its immense catalog of beloved movies and characters is one of the great Trophy Assets in American business. Its creative content and franchises are iconic.
But its secret engine for profits is running out of gas.
Yes, Disney possesses tremendous strengths. And subscribers to Stansberry Data products know that Disney is on our Trophy Asset Monitor list. It operates the largest and most profitable set of theme parks. It has accumulated the world's most valuable set of franchises: Star Wars, Marvel, Pixar, Mickey Mouse, etc. It monetizes content – via theme parks, movies, games, merchandise, and more – at an extreme rate of return on investment.
And yet, all those well-known assets combine to generate only half of the company's profits.
As they explained, the problem was the source of the other half of those profits...
These came from Disney's media-network business. And this business was under serious pressure as more and more consumers "cut the cord" and moved away from cable TV.
This segment includes ABC, the Disney Channel, and other channels that are part of cable companies' typical bundles. And as Porter and his team noted, one channel in this part of the business would be the "biggest loser in the unbundling" – sports-broadcasting colossus ESPN.
Many households in America love sports, but they'd rather not pay the high distribution fees – more than $7 per subscriber – to watch ESPN if they don't have to. By December 2017, ESPN had already lost more than 14% of its peak subscriber base. And it wasn't getting any better.
To be clear, Porter and his team of analysts didn't recommend shorting Disney back in December 2017. It simply had too many strong and profitable assets.
But with half of the company's profits at risk due to cord-cutting, they expected the stock to face significant headwinds.
So... what had changed by the following spring?
It had to do with a blockbuster move the company made less than two weeks after Porter and his team issued their warning about Disney shares.
On December 14, 2017, Disney announced its largest acquisition ever. The company agreed to buy fellow media giant 21st Century Fox for roughly $51 billion in stock. As Porter and Alan explained last April, the deal would give Disney access to several valuable new assets, including...
- 20th Century Fox Film Studio: Fox owns the Avatar franchise, which boasts the single highest-grossing movie in history. Director James Cameron is working on four Avatar sequels, and Disney is already building an Avatar section in its Animal Kingdom. Disney's [Marvel Cinematic Universe] would expand to include the X-Men, Fantastic Four, and Deadpool franchises (all currently under Fox's banner).
- 20th Century Fox Television: Fox owns rights to popular TV shows such as This Is Us and Modern Family, as well as classics such as Family Guy, Seinfeld, and The Simpsons.
- Cable Assets: Fox owns the FX Networks and National Geographic channels. ESPN's brand would be bolstered by the addition of Fox's 22 regional Fox sports networks and various sports rights in Europe, India, and Latin America.
- Hulu: Hulu is a media-streaming service with a major audience... But it's also becoming much more than that...
- Other Assets: Fox has a 30% stake in satellite TV company Tata Sky, which is India's largest broadcaster. Fox also has a 50% stake in Endemol Shine Group, the producer of hit shows such as Big Brother, The Biggest Loser, and Fear Factor.
In other words, they foresaw that Disney would further strengthen its world-class collection of 'trophies'...
But at the same time, it could help save the company's struggling media-network business.
In particular, it would give Disney a bigger stake in streaming service Hulu. More from the April 2018 issue...
Hulu is a direct-to-consumer ("DTC") platform owned by the content creators. Importantly, they don't have to go through Amazon (AMZN) or Netflix (NFLX), which act as middlemen standing between the film and TV studios and consumers. For as low as $8 per month, Hulu provides on-demand access to thousands of movies and hundreds of TV shows...
At the end of 2017, Hulu had more than 17 million subscribers. That's a far cry from Netflix's 117 million. But Hulu has an advantage that should drive massive subscriber growth... It's now beginning to offer live TV.
For $40 per month, it includes on-demand access to all the movies and shows you would get with the basic plan. But you can also watch more than 50 broadcast and cable channels, including ABC, CNBC, CNN, ESPN, Fox Business, TBS, and TNT. And you can add premium channels like HBO, Cinemax, and Showtime.
Hulu's new package is far cheaper than the $100 (or more) per month cost for most fat bundles. Indeed, Hulu is becoming a cord-cutter's dream... And Disney could potentially own a controlling stake in the platform.
Porter and Alan specifically saw the potential in this aspect of the deal...
They believed these assets – combined with some of Disney's other DTC activities – would allow the company to weather the cord-cutting trend just fine. In fact, they believed the deal could even help Disney turn around its most troubled asset...
ESPN is included in many skinny bundles. It's in two of the three Sling TV packages. And it's in Hulu's new TV offering.
Additionally, ESPN's own DTC offerings are on their way. ESPN's streaming service, called ESPN Plus, will launch this spring and cost $4.99 per month. Subscribers will gain access to thousands of live sporting events not available on current channels.
ESPN is also unveiling a revamped mobile application around the same time. This app will deliver sports news and content and mesh with the ESPN Plus service. It will also provide access to livestreams of all ESPN's networks (to those who already have ESPN in their pay-TV packages).
However, the market was not impressed by the news...
Despite this potential, it was still valuing Disney's media-network business for failure. And this presented a massive opportunity...
The market is largely ignoring ESPN's positive longer-term prospects... when DTC offerings could ultimately increase the profits and value of this one-of-a-kind asset.
In a sense, we're lucky that ESPN's woes have weighed on the shares... Disney is down 3% since we urged caution on the stock in early December, while the S&P 500 Index is up a little less than 1%.
We think Disney's stock is poised to dramatically outperform the S&P 500 for many years to come. It has simply become too cheap. Disney's box-office hits and its mega-deal for Fox are compelling catalysts.
In particular, Porter and Alan noted that Disney shares were trading at a big discount to the market, as well as the company's own 10-year average valuation...
Over the past 10 years, Disney's EV/FCF ratio has averaged at slightly more than 22 times. So the company is currently trading at a 17% discount to its average valuation. And with less reliance on ESPN, the company is more diversified than ever. Given this lower risk, we think Disney is an even better bargain than it appears relative to its historical valuation...
Today, the median EV/FCF in the S&P 500 is about 26. So Disney trades at a 29% discount to the market. Given that attractive relative valuation, we're nearly certain that Disney will outperform the S&P 500 over the next five years.
Rarely does a world-class collection of businesses, such as Disney's, go on sale when most stocks are highly valued.
But Stansberry's Investment Advisory subscribers weren't the only ones who could have seized this opportunity...
Just a few months later, in the July 13 Digest, Porter urged all Stansberry Research readers to buy shares of this high-quality, capital-efficient business.
The following month, he went even further... Writing in the August 3 Digest, Porter called Disney one of "the two best stocks you can buy in the world right now." He told subscribers... "If you don't own [these stocks], buy them."
And for good measure, Porter's team also highlighted the incredible opportunity in Disney a fourth time in our "Stock of the Week" feature on November 5.
We hope you listened...
As it turns out, Porter and his team weren't optimistic enough.
On Friday, Disney had its best day since May 2009. Shares surged nearly 12% to a new all-time high on news that the company is now officially launching its own streaming service – which is called "Disney+" – on November 12.
The company says this service is designed primarily for kids and families. But some analysts believe it could become a serious competitor to streaming giant Netflix.
That's because it will immediately become the "exclusive streaming home" of a huge array of popular Disney (and now Fox) content. As financial news network CNBC reported...
Disney+ will immediately include 18 of Pixar's 21 movies, most Marvel films, 30 seasons of Simpsons episodes (thanks to the Fox acquisition!), the Disney movie back catalog (Bambi, Snow White, Lion King, etc.), recent Disney movies (Moana, Frozen, etc.), 5,000 episodes of Disney Channel shows and 100 Disney Channel original movies, and a lot more.
That's quite a lineup... Yet it will also be priced significantly cheaper than Netflix's streaming services.
Disney+ will cost $6.99 per month, or $69.99 annually. Netflix recently raised what it charges for its service. Its basic plan now costs $8.99 per month, while its standard plan now costs $12.99 per month.
As our colleague John Gillin noted on the Stansberry NewsWire on Friday... with the content and price point for Disney+, every family with a child under the age of 12 is likely to sign up. And we suspect many families without children will, too.
In short, Disney is ramping up its DTC business even faster than Porter and his team expected...
And this is no accident. As Chairman and CEO Bob Iger revealed for the first time in an interview on Thursday, it was Disney's intention from the beginning. More from CNBC...
[Iger] told CNBC on Thursday that his conversations with Fox's Rupert Murdoch were predicated on the introduction of Disney+ and followed its 2017 purchase of BAMTech, a New York-based streaming media company...
"We would not have done that transaction had we not decided to go in this direction," Iger continued, "because – if we hadn't, we would have been looking at that business and through a traditional lens: 'Oh, we're buying TV channels. We're buying more movie-making capability, etc.'"
"But by the time the acquisition opportunity came up, and we knew we were going in this space, we evaluated what we were buying through this new lens of... 'What could it mean having access to [Fox's] library, not to monetize it through traditional means, but to do it through this?'" Iger added. "Bam! I mean, the light bulb went off."
Stansberry's Investment Advisory subscribers are now officially up nearly 30% in a little more than a year so far. Meanwhile, Digest readers who took Porter's advice could be up about 20% in just nine months.
Kudos to Porter and his team for another great call.
New 52-week highs (as of 4/12/19): Automatic Data Processing (ADP), CBRE Group (CBRE), First Trust Nasdaq Cybersecurity Fund (CIBR), Cabot Oil & Gas (COG), Disney (DIS), Fortinet (FTNT), Ingersoll Rand (IR), McDonald's (MCD), MarketAxess (MKTX), Microsoft (MSFT), Procter & Gamble (PG), Rio Tinto (RIO), Rollins (ROL), Starbucks (SBUX), SPDR S&P Dividend Fund (SDY), T-Mobile (TMUS), Vanguard Real Estate Fund (VNQ), and W.R. Berkley (WRB).
Have you benefited from our advice on high-quality stocks like Disney? Let us know at feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
April 15, 2019