The Walt Disney Company has released information and images of MyMagic+, its upcoming technology expansion at the global theme parks. The project is brilliant. Not only is MyMagic+ likely to make customers much happier, it is probably going to result in a significant increase in per room spending at the resorts. The New York Times has an excellent story on it, along with an image of what the band is going to look like thanks to Disney’s promotional graphics. A quick perusal of the facts and you’ll understand why I say that the media empire is in the midst of a multi-year golden age. Is a certain character more popular at specific times of the day? How about having Princess Jasmine know your daughter’s name as she walks up to her, as if by magic? Don’t want to carry a room key or credit card around during your time in the park? MyMagic+ solves all of this, and more. It’s like a real world analytics package that is transformative. They are even removing turnstiles so families with strollers won’t have to deal with them; instead, just tap your wrist with your MyMagic+ wristband and walk through to the Magic Kingdom, Epcot, California Adventure, or other park.
I realized the entire MyMagic+ announcement presented an opportunity to discuss capital budgets, and how retained earnings matter. Many of you are familiar with the fun little side project I started a couple of years ago, when I began buying 100 shares of Disney common stock during each of my family’s vacations at the park. It was my version of a souvenir, and I’ve been using it as a real-world illustrative tool to teach some basic concepts. I even keep a public Google Doc spreadsheet on it that shows current information on the stake.
As of this evening, this academic experiment holds 305 shares of The Walt Disney Company common stock. That means, in basic terms, that my family owns 305/1,821,000,000ths of the business. Running some numbers, it isn’t hard to calculate what my pro-rata share of the income statement is each year based on this stake, just as if it were a private business that I had other people run for me.
In a very literal sense, over the past 12 months, approximately $7,286.45 of the cash collected by Walt Disney at its theme parks, movie studios, television networks, and video game studios belonged to me. Likewise, when the firm goes to pay its cast members, executives, janitors, animators, directors, accountants, voice actors, cruise ship captains, and bakers, $5,788.90 of those expenses were mine (for what it is worth, $6.67 of those expenses went directly to Walt Disney’s fantastic CEO, Bob Iger, though not all of that was counted in the figure as some was the result of equity compensation gains, requiring an accounting discussion that is not worth going into here). This left pre-tax operating profit of $1,497.55. The United States Government, and other municipalities and sovereign nations, took another $491.05 out of my pocket for taxes. Thus, what remained, was $1,006.50 in after-tax net income that was entirely mine.
The directors of the Walt Disney Company, who are elected to represent the interests of the owners, decided to mail $228.75 out as cash, and retain $777.75 for growth. This program, the MyMagic+ technology upgrade, is going to cost $800 million to $1 billion, or somewhere between $0.44 per share and $0.55 per share before depreciation deductions and other write-offs.
That works out to $134.20 to $167.75 for my pro-rata cut of the upgrade budget. Roughly speaking, that cash came right out of the $777.75 that Disney’s directors decided not to send me and, instead, plow back into the business. How well my ownership stake does for me in the future will depend on whether that money was wisely invested, since I know my initial purchase price was rational relative to assets and earnings based upon then-known factors. Will MyMagic+ increase sales? Will profits rise at a rate sufficient to generate a real return on the money significantly above the firm’s cost of capital? If the answer turns out to be, “yes”, then over the coming years, I should end up collecting far more future profit, discounted to present, than I had to give up today to fund the growth.
That is what I pay attention to when I look at the portfolio. I want to know how much profit is being generated relative to my personal cost and the direction of those two figures. I would posit that a significant majority of other “investors” – and I use that term lightly – are looking at the current market value, which is simply what other people are willing to buy or sell their stake for at a given moment. To me, it’s completely inconsequential except that I may buy more if I think people are being stupid and selling at too low of a price, or sell some shares if I think people are offering me ridiculously rich valuations that can’t be justified by the long-term intrinsic value, after factoring in the advantage of deferred taxes.
A quick look at the current market value for the past few months shows that other people are willing to pay me between $18,000 and $21,000 at any given time for my share of the Disney business. Am I really any poorer, since I don’t plan on selling these shares for a long, long time if other people decide they suddenly only wanted to pay me $7,000 for them? Not unless I am forced to sell and, to quote Benjamin Graham himself, “The true investor is rarely forced to sell”. If that potential exists, the capital should not have been invested the stock market in the first place, it should have been put into a capital preservation portfolio. Am I really any richer if they suddenly offered me $50,000 for it? Only if I sold and redeployed the money into a better returning asset because the underlying value of the Disney company wouldn’t have changed. (In this case, I think such a valuation would be completely, irrationally, beyond non-justiable, so I would liquidate and transfer the money, instead, to something like Nestlé. I wouldn’t be able to sleep at night holding one of the world’s largest firms at a 2% earnings yield when perfectly good, highly quality blue chip stocks are offering nearly 3x that amount elsewhere, not to mention the long-term rate of inflation in hovering around 4% per annum).
I cannot wait to see the RevPAR rates and other spending metrics for the theme parks in the SEC disclosures over the next few years as the MyMagic+ program comes into fruition. I wish the shares were a bit cheaper. A nice 30% drop would put them around the edge of my calculated sweet spot. Where is a good crash when you need one?