Buying strong businesses with top-quality brands is a proven way to build lasting wealth, particularly if you can do so when they're out of favor.
That's not unusual for the Burbank, Calif.-based entertainment juggernaut, which is celebrating its 90th birthday this year. In that span, it's carefully constructed a stable of brands that's the envy of the entertainment world, including Lucasfilm (creator of Star Wars), the ESPN sports network, Pixar, Marvel Entertainment, ABC and specialty channels such as A&E, Lifetime and History.
But while Disney may be winning the brand wars, its stock has taken a bruising this year, declining 12%, compared with a 4% gain for the S&P 500. Disney now trades at 16.6 times its last 12 months of earnings, a discount to media rivals like Comcast, at 18.8, and Time Warner, at 17.7. Shares fell a little more than 1% in Monday trading.
Investors are particularly worried about declining viewership at ESPN, and those fears haven't been eased by the NFL season's rough start, with TV ratings dropping double digits overall so far. You can blame some of that on the election: Going back to 1996, NFL viewership has a history of slumping 2% to 10% in years when the White House is up for grabs.
Throw in this year's matchup between Hillary Clinton and Donald Trump, with a more shocking episode coming seemingly every day (and don't forget, the first debate ran head-to-head with ESPN's Monday Night Football), and you get some of the explanation for the shortfall.
But that's not the whole story: Disney's TV networks are battling for eyeballs with myriad other distractions, the most potent being streaming services such as Netflix, which are prompting many households to drop cable TV entirely.
That's a big shift, to be sure, but investors are overlooking Disney's long history of skillfully navigating changes in the media business. Today, part of its strategy revolves around finding new ways to leverage the ESPN brand.
For example, in August, Disney said it would spend $1 billion for a one-third stake in Major League Baseball's BamTech streaming service, with an option to buy full control. BamTech and Disney are now working on a standalone ESPN-branded subscription streaming service that will show MLB games, as well as football, basketball and college sports.
As well, after originally being counted out as a potential buyer of Twitter, Disney is rumored to be interested again. Twitter's struggles are well documented, but a deal would give Disney access to the social network's 317 million users, as well as its valuable online audience-building expertise.