A spoonful of Quality
In 1966 Warren Buffet invested US$4 million to own 5% of a company. He sold this stake a year later for US$6 million. Three decades later he described that sale as his worst investment mistake.
In 1966, Disney had a debt-free balance sheet and stable earnings from a stable of family friendly films, the most recent hit being Mary Poppins and theme parks. Warren Buffett spotted this and invested. A strong balance sheet and stable earnings are two factors that are commonly referred to as 'quality factors'. In 1966 Disney was a quality company.
Had Buffett maintained his investment it would now be worth in excess of US$12 billion. However, Disney has not always exhibited quality factors.
Fast forward around 30 years to the time of Buffett's speech outlining his investment mistake by selling his Disney shares. This is when Disney was riding high on the back of a strong decade built on the rejuvenation of animated films that began with The Little Mermaid. The problem was Disney was no longer a quality company. It had high debt and its earnings were suffering. Investments in EuroDisney floundered and its acquisition of television network ABC proved disastrous as new shows flopped. The then CEO Michael Eisner was eventually ousted.
Since then Disney has been revitalised. With its unrivalled catalogue of films both new and old, Disney seems immune from competition. Warren Buffett often mentions the importance of a business having "barriers to entry" to prevent competition by using an analogy of a moat surrounding a castle. The moat Disney has been building around its Cinderella castle is impressive. Its theme parks and tourism services are thriving. Also, augmenting its own stable of movies, Disney has bought Pixar Animation (2006), Marvel Entertainment (2009) and Lucasfilm (2012). The Pixar and Marvel acquisitions have resulted in some of the biggest box office successes of all time. If interest in the new Star Wars film is anything to go by, the first 'teaser trailer' was viewed 88 million times in 24 hours, its Lucasfilm acquisition is also likely to have a high return on investment.
Looking at the numbers, many of the reasons Buffett invested in Disney in 1966 are the same reasons that Disney was included by MSCI in its MSCI World ex Australia Quality Index (QUAL Index) at its most recent rebalance. The table below shows Disney's earnings per share growth. Further, its return on equity (ROE) is currently over 17%, rising from 10% in 2010, and while it does have some debt, its balance sheet is strong.
Table 1: Disney's quality profile
Source: Facstet. Data at calendar year ends.
As Van Eck Global's research illustrates investing in companies with the financial characteristics that Disney currently exhibits, has delivered significant outperformance compared to the broader market. Disney is just one of the companies currently identified by MSCI currently identifies as having the fundamental financial characteristics that justify inclusion in its QUAL Index.
The Market Vectors MSCI World ex Australia Quality ETF with the ASX trading code: QUAL, replicates MSCI's QUAL Index which currently includes Disney and other quality companies such as Apple, Roche, Microsoft, Boeing and Inditex.
QUAL provides the potential to outperform broader international equity markets, at a lower cost than comparable actively managed funds.
Using QUAL you can now own Disney shares and share in the potential upside of the next phase of Avengers movies, the planned Star Wars sequels and Frozen 2, which will probably be bigger than them all.
Disney is used by way of example only and this does not constitute a recommendation to invest in Disney.
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