Disney and Tesla

By Malcolm Berko

May 16, 2018 5 min read

Dear Mr. Berko: We bought $50,000 worth of the 5.3 percent Tesla bond in August 2017. Our stockbroker wants me to sell, take a tax loss and use the remaining money to buy 200 shares of Tesla stock. My wife is insistent that we buy 800 shares of The Walt Disney Co. We need your opinion. — JL, Portland, Ore.

Dear JL: You've got a smart spouse. I'd listen to her.

Holy Moses, Marie and Malachi! It's hard to believe that just a dozen years ago, The Walt Disney Co. (DIS-$102) was trading at just $24. And jumping Jack Sprat, who would imagine that in 1967, just before a 2-for-1 split, Disney was trading at $100 a share? Gee whiz, Willie Lee, if you had bought 100 shares of DIS in 1967 and held it through six splits, today you'd own 34,800 shares worth about $3.5 million. That's not an unacceptable return.

Today DIS isn't just an amusement park. Disney owns media networks, including ESPN and ABC, accounting for 43 percent of its $55.6 billion in 2017 revenues; parks and resorts — including Animal Kingdom, Epcot, a cruise line and parks in Paris, Tokyo and Hong Kong — which contributed 30 percent of 2017 revenues; studio entertainment, which is responsible for 17 percent of revenues; and consumer products and interactive media, which produce 10 percent of revenues. And the Disney beat goes on. In December, DIS signed an agreement to buy 21st Century Fox, which includes film and TV studios, their respective libraries, and cable and international TV operations. DIS will pay $53 billion for 21st Century Fox, which is about $30 billion less than AT&T wishes it could pay for Time Warner. I'm told by a moderately knowledgeable source that if the government prevents the $85 billion AT&T and Time Warner merger, Disney could make an offer.

At $102 a share, DIS trades at a reasonable 16 times this year's expected earnings of $6.20 a share, up from $5.60 last year. And DIS' price-earnings ratio is significantly lower than the 24-to-1 P/E of SPY, which is the exchange-traded fund representing the S&P 500. I'll not wax eloquently about DIS, except to say that its management and its board are serving the company extraordinarily well. As a result, the strength of Disney brands and content should continue to drive earnings and profits. The 21st Century Fox merger will create a gargantuan media powerhouse and can hugely increase output capacity from its studios while enormously expanding DIS' global and marketing footprint. DIS has an impressive balance sheet (financial strength is rated A++) and soundly improving operating margins and net profit margins, and the company is responsible for nearly 200,000 employees.

So, without further ado, tell your broker to stick a feather in his hat and sing "Yankee Doodle"! Then tell him to buy 800 shares of DIS. Many knowledgeable investors believe that in the coming few years, DIS shares could trade between $160 and $175. Certainly, Vanguard, which owns 100 million shares, and BlackRock, with 93 million shares, seem to agree.

I'm not comfortable with Tesla (TSLA-$282). I never have been and doubt I ever will be. I don't like companies that have zero earnings, that require tax credits to survive, that have little chance of being profitable, that burn through a $1 billion every quarter and that constantly need more cash to continue operations. Sell your $50,000 worth of Tesla's 5.3 percent unsecured bond, which you thought was such a good deal last August. It's now trading at 88 cents on the dollar; you have an ugly 12-point loss. That bond will go lower. Believe me! TSLA may be coming to the market for additional funds next quarter, and I suspect that CEO Elon Musk will have to pay through the schnoz for this round of financing. Some believe that TSLA has lost its cachet. Alphabet recently announced that it may buy 20,000 electric autos from Jaguar and Land Rover as part of a robotic taxi fleet. This is a major rump bump for TSLA. I suggest that you use the sale proceeds to buy 800 shares of DIS rather than TSLA.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

Photo credit: at Pixabay

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