Why Some Great Businesses Can Be Bad Investments
So I recently just got back from a trip to Disneyland, and if you've ever been to Disneyland, you know just how insane it is.
If you go in the middle of summer vacation like I did, the park is a sweaty, chaotic sea of hysterical people who will willingly wait in line for two hours to experience a ten minute ride. Not only that, but they've willingly paid hundreds of dollars just to be there.
While at the park, many will spend hundreds of more dollars on food, merchandise (like Mickey Mouse ears - over $30 a pair), confections (my favorite is the Churro Toffee - $7.49 per square), and countless other items without batting an eye.
In addition, I can't tell you how many adults I saw foaming at the mouth to take pictures with Snow White and Cinderella. It's truly unlike anything I've ever seen.
At any rate, with my investor goggles on, I couldn't help but notice the incredible, captivating effect this place had on its visitors. It was obvious that the park makes a killing, and it's actually estimated to make $20-$50 million every single day.
I had never seriously considered Disney as an investment, but after taking it all in, I became curious about what's under the hood and did a little research.
What I found was that while Disney's magical empire may have an unbreakable hold on millions of people worldwide, it hasn't been such a hot investment.
Over the past 10 years, Disney has experienced a noticeable decline in its gross profit margin, dropping from about 44% in 2013 to 34% in 2022.
This margin compression, paired with a doubling in operating expenses over the years, has had a significant impact on the company's earnings per share (EPS), which decreased from $3.42 in 2013 to $1.73 in 2022. Along with this, they had to make the difficult decision to cut their dividend back in 2020.
Beyond these financial challenges, Disney's stock performance has been lackluster, to say the least. While the S&P 500 has seen an impressive 222% total return over the last decade, Disney's total return was a mere 42%. Such underperformance raises concerns about whether this company, as iconic as it is, can be considered an attractive investment.
With that in mind, I think Disney teaches us a valuable lesson in the world of investing.
Iconic and legendary companies may not always be the best investment choices when their financial health and performance (...and, as a result, their share price performance) are lackluster. As investors, it's essential to maintain a balanced approach, weighing the company's qualitative factors against its quantitative factors.
Can you think of any other companies similar to Disney that are iconic but fall short as investments? Write to me here and let me know. I can think of a few more off the top of my head, and I'll be curious to see if you have the same ones in mind.
And a big thank you to the 20 readers who responded last week. You rock! 🙌
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