Disney, and how to play the recovery

Michael Frazis

Frazis Capital

As the virus recedes, it's increasingly clear that the worst case scenarios feared in March are unlikely to come to pass. Attention has turned to recovery plays. Here are a few that keep coming up in conversation.

Six Flags is a pure play on theme parks - though the firm was under pressure before the coronacrisis:

Six Flags Entertainment Corporation

Vail, which runs ski resorts, is another commonly discussed candidate, though as you can see you had to move quickly to take advantage:

Vail Resorts Inc

We found Christine Jurzenski convincing on Live Nation, which runs a surprisingly integrated model providing premier live entertainment and associated ticket and product sales. It's hard to say if concerts will be back in 3, 6 or 12 months, but it's probably safe to say that within two years business will be booming again. Premium, live, and memorable experiences are likely to continue to do well in the digital age.

Live Nation

Buying airline stocks seems to us a poor way to play the recovery, as losses are still accumulating, gnawing away at balance sheets. Future value is path dependent, and paths are unpredictable.

It is almost certainly an excellent time to start an airline. Tightly held airport slots around the world are up for grabs, new-build and second hand planes are on the cheap, and there are plenty of qualified staff looking for work.

Enduring demand for cruise ships continues to surprise those of us who never quite understood the appeal. These are capital intensive, competitive and cyclical businesses at the best of times. Perhaps some people will do well with their timing here, but it is not for us.

We thought the equity outlook at the end of March was positive, but instead of recovery plays, we intensified our focus on leading technology companies that accelerated through the crisis, such as e-commerce leaders like Pinduoduo, Shopify and Sea.

Buying high quality, fast growing technology companies may be the single best way to take advantage of the indiscriminate liquidations. This proved true in March 2020, as well as December 2018, early 2016, 2008-2009, and certainly the aftermath of the tech wreck of the early 2000s.

For some reason people look at those episodes and take the lesson that markets can sell-off more than one might expect, and hence equities are dangerous. But perhaps a better lesson, and one that we've taken to heart, is that buying fast-growing technology leaders during those crises would have done extraordinarily well.

This time proved no different:

Sea Ltd

Pinduoduo, which we wrote about last year here


Nevertheless, there are some recovery plays we are looking at closely. Airline software firms like Amadeus and Sabre, for example, have fallen steeply and are within our technology remit:

Sabre Corporation

These are not the sort of software companies we would usually look at. You could argue Sabre and Amadeus have market leadership, but they are low growth and, as they were once considered low risk, carry debt.

Booking systems are critical to airline operations so their bills tend to be paid even as airlines themselves flip in and out of bankruptcy. These features attracted a certain sort of private equity investor, so they’ve traded in and out of public hands, and suffered the lack of investment and innovation that sometimes comes with cash-flow focused investors.

At least part of the reason why booking airline tickets is such a pain in the neck is due to chronic under-investment and cash-flow harvesting by companies like Sabre.

Our portfolio consists almost entirely of the opposite: companies with insatiable demand, investing every dollar they can to put their brilliant products in front of more people. These invariably look terrible on cash flow measures, but often create the most equity value. (As a side effect some are heavily shorted. This overlap is coincidental, if somewhat predictable).

Compare the pain of rebooking an airline ticket, to the joy of a company like Shopify, and you can see why we stick almost entirely to the later.

Nevertheless, there is a price for everything, and the factors that caused such a rapid fall going in to the crisis may also make firms like Sabre leaders coming out.

If ever there was a time for a modern competitor to break the Sabre/Amadeus oligopoly... it would be now. Airlines may never again have a better chance to renegotiate long-standing contracts, nor have a greater need for incremental efficiency. Something to watch for.


Which brings us to a better recovery play, and one that fits our focus on joy and customer love.

Disney is a fascinating company. The list of creative brands is inspiring, including Pixar, Marvel, Star Wars, 21st Century Fox, a license deal for the Simpsons, as well as ESPN, Hulu and National Geographic.

Disney's portfolio of parks, resorts and cruises is no less impressive:

Customer love and market leadership - Disney certainly has that in spades.

With Disney+, the firm now has the third pillar of our strategy: explosive growth. Disney+ added 55 million users in five months, which is a spectacular feat given the competition in the sector and the time it took Netflix to accumulate 190 million.

As always, we don't form opinions on what we think people will like, we simply look at the data.

This achievement was not without cost. Disney pulled their content from other platforms, costing billions of revenue. They have priced the product to sell, at A$8.99/month. The business is going to burn cash for quite some time.

But it is a masterful move. The low price point ensures Disney has direct access to the credit cards and viewing habits of what (we believe) will eventually measure in the hundreds of millions of customers.

This opens up a range of strategic options, and any future price increases will drop straight to Disney's bottom line, though the focus for the foreseeable future will be driving viewer numbers.

There are many trying to replicate Netflix's success in building a direct-to-consumer streaming platform, but none with the library and catalogue of the calibre that Disney brings to the table. Pixar, Marvel, and Star Wars are brands that can generate blockbuster after blockbuster. Disney had 5 of the top 6 grossing films in 2019.

Disney derives more of its profit from theme parks than content, but this is the wrong way to look at it. In effect, it is all content. Disney+ offers another route to monetization.

An interesting aspect of modern media is that it has materially improved the quality of the shows we watch.

It is not just the advance of technology that enables full scale battle scenes in popular TV shows - it's the ability to sell these directly to hundreds of millions of viewers over longer and longer periods of time. This justifies a magnitude of spending unthinkable ten years ago. Given all the capital available, there is likely no better time to act, write, or direct for the screen, nor indeed, to watch.

This crisis offered a rare opportunity: to buy Disney at a dramatic discount. The stock traded over $150 only a few months ago, only to lose nearly half of its value, as though their entire suite of theme parks was written down to zero.

Which is, ofcourse, nonsense. The parks are still there, and as the fear of coronavirus recedes into a sad memory, people will return. And Disney+ will be there with all its monthly-paying viewers, increasing both the demand and the consumption of Disney content, all while showing Disney precisely what is working and what is not. Their entire offering, from screen to park, will be constantly and systematically improved.

Disney is on the larger end of companies we'd look at. The median market cap of our portfolio is typically less than a tenth of Disney's. But the risk reward here looks solid. A rally from $100 to pre-crisis levels implied a ~50% return in the short to mid term. And it's entirely reasonable to expect the stock to trade above $300 within 5 years, which meets our 3x-in-5-years return target. Ofcourse, the stock has rallied since our first purchases, but the path to recovery is also now clearer.

Given the unique nature of Disney's content, the extraordinary integrated model, the joy the firm brings to people around the world, and the early success of Disney+, we expect Disney to be a core position for quite some time... and one of the highest quality ways to play a rebound.


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Michael Frazis
Founder and Portfolio Manager
Frazis Capital

Michael manages a global equity investment fund focused on technology and the life sciences. Michael completed undergraduate and graduate chemistry degrees at Magdalen College, Oxford University, and studied finance at the London School of Economics

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