When you think of Disney, the first images that come to mind are probably Mickey Mouse or a trip to the Magic Kingdom. But through the Trimark lens we see something quite different – opportunity.
Disney: Dominant in sports?
A big part of our investment philosophy is seeking out companies with a competitive edge, something that stops other businesses from competing or stealing market share. We found this in The Walt Disney Co. a top holding in Trimark Global Fundamental Equity Fund and Trimark Fund. (2.10% and 3.65% weightings respectively as at August 31, 2013).
What attracted us to Disney? One of Disney’s key strengths is its ESPN segment, which represents about 50% of Disney’s overall profits. What’s fascinating about ESPN is its live sports coverage.
Media distribution is a challenging business right now. Thanks to PVRs and free online access to news and entertainment, we now consume content whenever, wherever and however we want. This trend is not likely to change anytime soon, and many newspaper, magazine and television outlets are suffering
But in the sports world, live coverage is king – 90% to 95% of viewers watch events live – so for ESPN many of the today’s media challenges just don’t apply
As we examined competitors, we saw that ESPN is a truly dominant franchise. With over 60% sports revenue share compared to under 15% for Fox Sports. ESPN is also dominant in Internet sports news. The only medium where it ranks second is in the magazine sector, where Sports Illustrated has a half-century head start.
I believe that ESPN is truly one of the strongest franchises that I could possibly identify.
Disney: Movies are more than just film
Another often overlooked aspect of Disney is its strength in movies. In the last decade the company has acquired Pixar Animation Studios, Marvel Entertainment and most recently, Lucasfilm Ltd., owner of the Star Wars franchise.
The importance of this becomes clear when you compare a one-off, non-franchise film, such as Alice In Wonderland, with a franchise film such as Toy Story 3. These two movies had essentially the same global gross box-office results, but when you factor in the associated merchandise sales (i.e., toys, clothes, etc.), the numbers begin to look very different. The gross dollars generated from core franchise films such as Toy Story 3 or Cars generate over five times more gross dollars vs. the average one-off film, due largely to consumer product sales.
Disney: Why now?
As Disney expands into superheroes and Star Wars, the ability to cross-sell right through the whole Disney distribution platform differentiates the company.
I would argue that the numbers that we’ve seen out of Disney on a historical basis are now on a very good footing going forward. The normalized earnings per share (EPS) growth (using Sept 13, 2013 fiscal year end estimates of $3.38) over the past 3, 5, 10, 15, and 30 years has averaged 17.8%, 8.4%, 17.7%, 9.2%, and 14.4%, respectively. Dividend per share over those same time frames has averaged 27.2%, 15.5%, 13.1%, 8.9%, and 11.2%.
The bottom line is that it’s not so much what the average consumer thinks about the company (which is likely a resort or a theme park) that matters. In this case, our investment thesis is heavily based on distribution and platform.
Learn more about the Trimark Investments team.
Trimark Global Fundamental Equity Fund, Series A provided the following performance returns as at August 31, 2013: 1-year, 20.32%; 3-year, 11.86%; 5-year, 1.66%; 10-year, 1.23%. Trimark Fund SC provided the following performance returns as at August 31, 2013: 1-year, 20.02%; 3-year, 12.72%; 5-year, 2.96%; 10-year, 3.33%.