For that consistency and the regularity of earnings, pretty much regardless of worldwide strength- -- it is a global company -- the stock of Disney gets a premium to the average stock in the S&P 500. That makes sense to everyone, dogmatists and otherwise. Plus, if you get any event out of the ordinary that is positive, you will see a growth spurt coming from the higher earnings that the event may precipitate. So if you see, for example, a new franchise like Frozen develop, you are actually able to estimate that it could raise numbers now and in the out years as the franchise is developed through merchandise, television, the stage and ultimately theme parks.
But now we are going to get our first bout of indignation. If Disney's stock goes up too much without a concomitant increase in earnings estimates, then the purists would say that Disney's going up because of multiple expansion, a.k.a. the Greater Fool Theory. That's right, the sticklers would say, "Hey, I am perfectly happy to pay a premium price-to-earnings multiple to the average stock for Disney because it is an above-average company with superior management. But listen clearly. Do not ask me to pay a higher premium for those future earnings as the earnings go up. Or in dollars and cents, if the average stock is trading at 17x earnings and we have historically awarded Disney a premium multiple of 20x over time, three multiple points above average, don't start saying we are now going to pay 21x or 22x or 23x those earnings and think you can get away with it."
Yes, there's anger even about the notion of multiple expansion because the hide-bounders say that's not the way it works. The multiple has to stay the same on rising earnings or all you are doing is paying up and up for those same earnings. Why is this so sinful? The usual justification is something like what our mothers told us: if you have too good a time, someone is going to get hurt.
Me? If an institution is changed and changed for the better and it is becoming even more profitable than I thought, I totally condone paying a higher price-to-earnings multiple. I do it because it's my job to spot when companies have gotten better and aren't the same old companies and because I put a super-premium on superb management that executes in all environments and that's what Iger has done with Disney.The indignant ones get downright angry when actual professionals continue to pay up and up for a company like a Chipotle (CMG) or Monster Beverage (MNST) or Michael Kors (KORS). They think no company deserves too much of a premium to the average company, particularly when you are paying well in excess for what might be the hope of an acceleration in earnings, even though when you get it, as was the case with these three, they grudgingly accept that the stock deserved (past tense) to go higher. Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned. Editor's Note: This article was originally published at 6:59 a.m. EST on Real Money on March 6.
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