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We bought 75 shares of Disney at roughly $144.82 each. Following Monday’s trades, the Charitable Trust owns 575 shares of Disney. The buy will increase Disney’s weighting in the portfolio from 1.8% to 2.07%.
On Friday, we commented that as tempting as it was to step into those stocks most at risk of the omicron variant — the ones that need cross-border activity and are tied to travel and entertainment — we simply did not have enough information and felt it better to wait and see if we would get better prices Monday. With that being the case this morning, we are ready to take advantage.
While the omicron variant has certainly added a headwind to the experiential side of Disney’s operations (think parks, cruises and theatrical releases), we remain long-term bullish and see an opportunity to reduce our overall cost basis in a position that we have purposely kept small — precisely because when we initiated it, we acknowledged that we were not out of the Covid woods. Even with this purchase, the position will be small enough to allow for further buys should the pressure persist.
On the streaming front, as Jim called out in his morning alert, Loop Capital reduced their price target to $190 (from $205) citing a greater than expected planned increase in content spend to support the buildout of Disney+, which should hurt segment profitability, though help to achieve management’s 230 million to 260 million subscriber target.
While we acknowledge the spend could hamper profitability in the near-term, we think it is the right move to support long-term growth and as a long-term investors believe that near-term weakness resulting from growth-oriented investments represent buying opportunities.
As for our thinking on the experiential side, while that is something we will continue to monitor, we believe much of the pressure to be priced in at current levels and when looking for names with Covid-oriented risks, want to target those companies that have pricing power and proven to be in high demand as capacity restrictions are reduced, two factors we believe Disney demonstrated when they last reported earnings. Recall, management noted that the company’s new Disney Wish cruise ship (launching in June of 2022) is already “nearly 90% booked,” and that they have realized significant pricing power as customers are adopting new guest experiences and services like Genie+.
Though we remain of the view that we are not yet out of the woods, we believe that Disney will be a key beneficiary as pent-up demand is unleashed and that the increased content investments will not only allow Disney+ to achieve subscriber targets but also provide for a strong flywheel effect once content is fully ramped and experiential operating segments all allowed to operate at full capacity.
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