Disney may not be the hip, bright young thing among streaming services but its global heavyweight status is an attractive proposition for investors amid late cycle volatility, according to a portfolio manager.
The entertainment behemoth has belatedly entered the streaming market, with Disney+ set to launch in November. The home of Mickey Mouse, which enjoyed a jump in the market after the news was announced, will take on the original disruptor in Netflix having given the tech darling a head-start of at least eight years.
However, as Paul MacDonald, CIO at Harvest Portfolios Group pointed out, Disney brings two major value propositions to the table: a rich and deep selection of content (think Pixar, Marvel and Star Wars), and a globally recognised brand.
It led MacDonald to reflect on the Disney-versus-Netflix showdown and how this can play into an investor’s thinking. He believes it’s less a debate about streaming and more about the ability and robustness of global brands of similar ilk, like McDonald’s, Apple and Pepsi.
It's a theory that already appears to be playing out after yesterday's earnings report from Disney topped expectations and propelled shares 2.5% higher. Its 13% fall in profit was better than estimated as was sales but the positive response to the new streaming service also played a role.
MacDonald told WP: “It comes back to when you go to McDonald’s in Japan, you know the brand loyalty you are going to get.
“Global brands have the ability to transcend cultural borders. Disney movies are watched all over the world and there is a brand loyalty associated with them. People know when they go see a Disney movie, 95% of the time the quality is as advertised.
“That gives them a bit of a competitive moat in defensive markets or in more challenging economic environments. It also gives them the ability to be quick adopters in areas like streaming, where they can utilise their global prowess to gain a market share.”
Netflix are, arguably, the sexier name, with its innovative service established as the market leader and its stock price having risen more than 700% in the past five years.
But moving forward, MacDonald has concerns if its subscription numbers hit a wall and suggested that, for example, Apple’s ability to aggregate all the streaming services in one place gives them a long-term advantage. The other compelling argument for why investors should go to Disney is the fact content remains king, while its expansive business model offers global scalability.
MacDonald said: “It's just a more diversified operation, diversified globally and across products. They have huge depth of content across multiple genres.”
Disney is one of the top holdings in the Harvest Brand Leaders Plus Income ETF, which was founded on the premise that these global brands have similar attributes. The Harvest team started with a universe of the 100 leading brands, looking at cash flow, profitability metric and balance sheets before distilling that 100 down to 20.
It’s one of the firm’s core funds and consists of “behemoth companies” that are globally recognised and have long-term histories through different economic cycles.
MacDonald said: “We would suggest that now is the time to sharpen the pencil, focus on these types of companies. These are good businesses that have brand loyalty and can survive various market cycles.”
And he makes no bones about highlighting the brand recognition in the portfolio to reassure clients.
“To be perfectly honest, the way that I position the portfolio is I open up the slide. I don’t go through all the processes and metrics, I just go to our holdings list. Then I can come back to you in three months, six months or a year and, if I like the market but we are down, I can point to companies like Pepsi, McDonald’s, Apple, Accenture, Visa and Disney, which are well established and businesses you want to own through volatility.”