Berkshire Hathaway (BRK.B) chairman Warren Buffett has been on a stock-selling spree, and the conglomerate has now been a net seller of stocks for six straight quarters. Going by the “Oracle of Omaha’s” comments during Berkshire’s annual meeting last month, where he warned that the company's cash pile might surpass $200 billion by the end of the current quarter, Berkshire could easily be a net seller of stocks in this quarter, as well.
That the value investor in Buffett hasn’t been able to find many investments that fit his framework – especially on valuations – hasn’t been a secret. Furthermore, for over 5 years now, the legendary investor has been scouting for what he terms an “elephant-sized acquisition.” While Berkshire did scoop up insurer Alleghany Corp. for $11.6 billion in cash in 2022, that’s not the kind of “elephant” Buffett implied, considering the company’s ever-growing cash pile.
Warren Buffett Has Admitted to Making Many Mistakes
Buffett has admitted to several mistakes – not buying Alphabet (GOOG) and Amazon (AMZN) early, for instance. The investing legend has also acknowledged that selling his stake in Disney (DIS) was a mistake. Incidentally, Berkshire cashed out of Disney stock not once, but twice. If the conglomerate had held on to the stake, today it would be valued in the billions of dollars, and Buffett would have made a good return on the investment, despite DIS stock having delivered practically no returns over the last decade.
With Disney stock now trading only marginally higher than where it was in 2014, should Buffett reverse his mistake and splurge some of Berkshire’s cash in buying the company? Let’s explore.
Disney Has a Good “Moat”
Warren Buffett looks at companies that have a “moat” - which, simply put, is its competitive advantage. Disney is among the most iconic global brands, and is the proverbial “cradle to grave” business – offering something to every age group.
The company’s lucrative and hugely profitable Parks business continues to remain as popular as ever. Its dismal box office performance over the last couple of years notwithstanding, Disney’s movie franchise is also a lucrative business. While it might not be the kind of money spinner like the Parks, the movies franchise helps build the aura around the Disney brand, and fits well into the overall ecosystem.
While its legacy linear TV business has arguably sagged, that's more of an industry-wide phenomenon, and is not limited to Disney. The company’s streaming business has been a sore point with investors, and that segment’s quarterly operating loss peaked at nearly $1.5 billion in fiscal Q4 2022. However, under Bob Iger’s leadership – who returned as the CEO days after that earnings release – Disney’s streaming business is now almost at breakeven.
What’s Buffett’s View of Disney?
Buffett’s past comments show that the investing legend sees a good moat in Disney. For instance, in 1996, he said, "If I thought the children of the world were going to want to be entertained 10 or 20 years from now, and I was betting on who is going to have a special place in the minds of those kids and their parents, I would probably bet on Disney."
At the next year’s annual shareholder meeting, he echoed similar views. "Just think of what somebody would pay if they could actually buy that share of mind of billions of people around the world. You can't do it. You can't do it with a billion-dollar advertising budget, or a $3 billion advertising budget, or by hiring 20,000 super salesmen,” said the nonagenarian about Disney.
What Makes DIS a Good Investment
Disney is working on several growth initiatives while also aggressively cutting down costs. During its fiscal Q1 earnings call, it announced the launch of a sports streaming platform jointly with Fox and Warner Bros. Discovery (WBD), while reiterating the 2025 launch of an ESPN streaming service. Sports streaming could be among the key growth drivers for Disney going forward.
The media giant also announced a $1.5 billion investment in Epic Games, which is the publisher of the globally popular video game Fortnite. According to Iger, video games offer “significant opportunities for growth and expansion.”
Disney is working on $7.5 billion in annual cost savings, which Iger said the company is on “track to meet or exceed.” Also, as the streaming business is on the cusp of becoming profitable, it will start contributing to the bottom line, rather than dragging it down.
Should Buffett Buy Disney Shares?
Disney is the kind of company that Buffett likes – profitable, competent management, good moat, and an easy-to-understand business. The legendary value investor has his own valuation framework and has often shown disdain for some widely used metrics, especially those tied to earnings before interest, tax, depreciation, and amortization (EBITDA).
However, with a next 12-month (NTM) price-to-earnings (PE) multiple of just around 20x, I find DIS stock attractive, especially considering the expected increase in earnings over the next few years.
While Disney’s return on equity might be lower than what Buffett would ideally want, I find the stock a value name that also brings prospects of reasonably strong growth to the table. Overall, with its reasonable valuations and strong moat, I find Disney a “Buffett-type stock,” and would buy the fear, as Buffett has often preached.
On the date of publication, Mohit Oberoi had a position in: DIS , BRK.B , GOOG , AMZN . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
