Disney shareholder: I like the stock because all kids 'almost automatically' become customers

  • Disney's ability to bring new generations of families into its ecosystem sets up the company and its stock for years of success, says money manager Bill Smead.
  • "You're getting a great risk-reward ratio right now," contends the founder of Smead Capital Management, which owns about $80 million worth of Disney stock.

Disney's brand loyalty, built up over nearly 100 years, and its ability deliver those movie, media and theme park brands to new generations of families sets up the company and its stock for years of success, Smead Capital Management founder Bill Smead told CNBC on Tuesday.

"You're getting a great risk-reward ratio right now," said Smead, whose investment firm owns about $80 million worth of Disney stock. The shares, which are up about 2.7 percent in 2019, are lagging the S&P 500's nearly 9 percent year-to-date increase.

"The thing about the Disney Corp., is a child is born in the United States and they're almost automatically a customer," said Smead. Parents and grandparents can't wait for the kids to experience the Disney ecosystem, he said.

"Therefore parks and movies and brands and characters just incredibly flourish because of the incredible goodwill attached to two prior generations of family before they come," he contended, a day after Disney reported better-than-expected quarterly earnings and revenue.

With the parks business contributing to those strong results, Smead said the company can almost name its price for how much to charge for admission.

"If you looked into the numbers, they raised the prices in the parks because they have got to find a way to regulate the number of visitors inside the park. You're going to ruin the experience for people if there's too many people in the park. The only way for them to regulate [is] through price," he said.

The Walt Disney character Mickey Mouse greets children at Magic Kingdom in Orlando, Florida.
Getty Images
The Walt Disney character Mickey Mouse greets children at Magic Kingdom in Orlando, Florida.

"Is it worth $150 to go to the park? Is it worth $200 to go to the park?" Smead asked, rhetorically, saying he believes that given all the demand "there isn't a number anywhere near where we are right now that would interrupt that."

On the streaming side of the equation for Disney, "content is always king," Smead said. "No one can touch their streaming content," he contended, pointing to sports from ESPN and movies and original television shows from the entertainment group.

The new ESPN+ sports streaming service, which launched last year, doubled the number of paying subscribers from five months ago to 2 million.

However, streaming remains a money-losing business for Disney, which is experimenting with a number of ways to take on Netflix, which comes at a cost. Disney expects to lose $150 million in operating income in 2019 as it ends licensing deals with Netflix in preparation for delivering all that content on its own streaming service, Disney+, by year-end.

"In the capital markets in the last five years, you were much more rewarded for spending money on things that would cause you to do well 10 or 20 years from now," Smead said.

"So they just kind of took a timeout a year or so ago and said, 'Hey, we're not getting any multiple for our earnings and free cash flow; why don't we make the investment right now that kind of fights off these threats to one side of business,'" he added.