Berkshire Hathaway Chairman Warren Buffett has been on a stock selling spree, and the conglomerate has already been a net seller of shares for six consecutive quarters. Following comments from the “Oracle of Omaha” during Berkshire’s annual meeting last month, where he warned that the company’s cash reserve could exceed $200 billion by the end of the current quarter, Berkshire could easily be a net seller of shares in this quarter, since Well.
That Buffett’s value investor hasn’t been able to find many investments that fit his framework (especially at valuations) has been no secret. Furthermore, for more than five years now, the legendary investor has been looking for what he calls an “elephant-sized acquisition.” While Berkshire snapped up insurer Alleghany Corp. for $11.6 billion in cash in 2022, that’s not the kind of “elephant” Buffett hinted at, considering the company’s 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 example. The investing legend also acknowledged that selling his stake in Disney (DIS) was a mistake. By the way, Berkshire cashed in on Disney stock not once, but twice. If the conglomerate had retained the stake, it would be valued in the billions of dollars today and Buffett would have made a good return on the investment, even though DIS stock has delivered virtually no returns over the past decade.
Now that Disney stock is trading only marginally higher than it was in 2014, should Buffett reverse his mistake and splash out some of Berkshire’s cash on buying the company? We are going to explore.
Disney has a good “moat”
Warren Buffett analyzes companies that have a “moat” which, simply put, is their competitive advantage. Disney is among the most iconic global brands and is the proverbial “cradle to grave” business, offering something for every age group.
The company’s lucrative and hugely profitable parks business remains as popular as ever. Despite its dismal box office performance in recent years, Disney’s film franchise is also a lucrative business. While it may not be the kind of money-maker like the Parks, the film franchise helps build the aura around the Disney brand and fits well into the overall ecosystem.
While it can be said that its former linear television business has weakened, it is more of an industry-wide phenomenon and not limited to Disney. The company’s streaming business has been a sore spot for investors, with that segment’s quarterly operating loss peaking at nearly $1.5 billion in the fiscal fourth quarter of 2022. However, under the leadership of Bob Iger , who returned as CEO days after the earnings release, Disney’s streaming business is now nearly breakeven.
What is Buffett’s opinion on Disney?
Buffett’s previous comments show that the investing legend sees a good moat in Disney. For example, in 1996 he said: “If I thought that the children of the world were going to want to be entertained in 10 or 20 years and I was betting on who would have a special place in the minds of those children and their parents, I would probably bet on Disney.”
At the following year’s annual shareholder meeting, he echoed similar sentiments. “Just think about what someone would pay if they could actually buy that part of the minds of billions of people around the world. It can’t be done. It can’t be done with a billion-dollar advertising budget, or with a budget of 3 billion dollars, advertising budget, or hiring 20,000 super salespeople,” the nonagenarian said about Disney.
What makes DIS a good investment?
Disney is working on several growth initiatives while aggressively reducing costs. During its fiscal first-quarter earnings call, it announced the launch of a sports streaming platform alongside Fox. and Warner Bros. Discovery (WBD), while reiterating the 2025 launch of an ESPN streaming service. Sports streaming could be among Disney’s biggest growth drivers 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 to save $7.5 billion annually in costs, something Iger said the company is “on track to match or exceed.” Plus, since the streaming business is about to become profitable, it will start contributing to the bottom line, rather than dragging it down.
Should Buffett Buy Disney Stock?
Disney is the kind of company Buffett likes: profitability, competent management, a 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 linked to earnings before interest, taxes, depreciation and amortization (EBITDA).
However, with a price-earnings (PE) multiple of around 20 times (NTM) for the next 12 months, DIS stock looks attractive to me, especially considering the expected earnings growth in the coming years.
While Disney’s return on equity might be lower than Buffett would ideally like, I consider the stock to be a value name that also brings reasonably strong growth prospects to the table. Overall, with its reasonable valuations and strong moat, I consider Disney to be 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 are for informational purposes only. For more information, see Barchart’s Disclosure Policy here.
