 Good day, fellow investors. A stock that was required a lot for me to analyze is Disney because, A, it is a great business. It provides a decent return and it has great growth opportunities based on their good brands. So, to give an overview over Disney, we'll discuss the Fox acquisition, the direct-to-consumer business model, compare it to Netflix and see where I think that Disney has a big advantage and we can say that Netflix built it but Disney is going to milk it. So, thank you Netflix from a Disney shareholder perspective. Thank you Netflix, thank you for building it and now let the big boys come in and make the money. In this video, I'll discuss why Disney is a great business, the current fundamentals, the acquisition, compare it to Netflix, the investment thesis with three scenarios and then see about the conclusion and why am I covering Disney and why am I looking at this company over the long term. So, why is Disney a great business? Well, revenues increased 63% over the last 10 years, net income increased 240%, book value increased 86% and cash flows increased 184%. While the number of shares actually went down by 17% due to buybacks. If Disney does, similarly, in the next 10 years you have nothing to worry about your investment in Disney. It will simply continue with the same return on investment capital, it will leverage the content it has, it will make money, the parks, new teams, etc. So, it is a good business that has a strong brand and we can also say it has a mode in a certain form. The future is uncertain, which gives different possibilities to the stock price, to the investing returns, which is something we'll discuss later. Let's look at current fundamentals. The dividend yield isn't that much, 1.58%. However, the price earnings ratio of 15, 16, 15 is something interesting because the earnings yield is about 6.5%. That's not an amazing return, but compared to the market's average, it's better than the market. So, we have a company that has been growing in the past, is giving a 6% yield and is expected to grow, to continue to grow in the future, especially with DTC and the Fox acquisition. Let's dig a little bit deeper into the Fox acquisition, see how it fits with Disney and whether it is a positive or a negative. So, there have been a lot of unknowns related to the Fox acquisition and a big headline about the exorbitant 71.3 billion paid by Disney. However, that 71.3 billion has to be put into perspective. Disney will issue 343 million shares, so that's not a cash cost that Dilution covers for 48 billion, 33 billion to go. Fox divested its 39% stake in Sky for 15 billion and the money remains with Disney, so 18 billion to go. Add the 14 billion debt that Disney is going to assume from Fox and we have an increase to Disney's debt of 31 billion. Given the divestiture of Sky, 31 billion, Disney might keep its credit rating, which means that the interest payments, especially with the Fed pausing, the interest payments on the 31 billion of new debt won't be that high, perhaps 3-4-5% in the worst case scenario, so 5% of 30 billion is 1.5 billion per year. What they acquired for Fox has already 2 billion in free cash flows, which is enough to pay for the new debt. Further, if there is, they reach the 2 billion in synergies that they expected to reach from the acquisition over the next few years, that's another 2 billion in free cash flows that will make the debt repayments much, much easier. Now, they acquired a bunch of things, so they will be able to leverage on that, combine the content, combine the costs, have a bigger international footprint and increase the direct-to-consumer offerings where they will be competing, or let's say not even competing, they will be in the same business as Netflix, but I wouldn't call it competition. The first thing that I'm thinking is, why wouldn't you have both Netflix and both Disney for 10-12 bucks a month? Why not? If you want to watch this, you want to watch this, so there is, I think, more customer spending in the environment, plus I really think that Disney has better content, so it might just take what Netflix took so long and so much time and so much effort to build. So for example, over the last 12 months, Netflix spent 13 billion for addition to streaming content assets, 10 billion in 2015, 8.6 billion in 2016, plus it spent on customer acquisition, marketing, making it normal for people to have something like Netflix. And then Disney comes, they have the content, they have the brand, they are welcome in people's homes and now they come with Netflix that has already built, let's say, the mental infrastructure of buying the DTC services. And now they come and they can say, thank you Netflix for spending so much money to create the field, to create a market for us. The key is that I subscribed to Netflix two weeks ago to test it, to see, okay, what it is there and the difference, the main difference is volume. Netflix goes for volume, a lot of content, but Disney I think has a better quality and as we know, trust me, I work on social media, I, my business depends on social media. Content is king, the quality of content is king and the strength of the brand, the familiarity, and when I look at Hulu, just Hulu in this case or Fox or everything, the brands are more familiar. Star Wars will not be licensed to Netflix anymore, it will be kept for Disney plus, ESPN, we have the sports, we have so much things on Disney that Netflix can simply compete. Okay, the story looks positive, looks strong, it will be unlinear of course, but the potential is there for Disney to make something similar to what Netflix has done in the past. The market caps are similar, so it's something really crazy, but so Netflix is of course overvalued, I think it has a broken business model, it has huge cash outflows, huge content costs for not such a great content. So it's still running on that growth story that might or might not work out, which is a high risk compared to Disney, which looks like a much more stable business, huge brand, long term history, positive, positive, I said positive, cash flows. Now I made three scenarios, the first scenario is a cozy pessimistic scenario. Let's say that in five years they reach Netflix revenue, I would dare to add five billion in free cash flows over the next five years, just from direct to consumer. And if we add the two billion in synergies, two billion from what Fox already has, that's 10 billion at some growth, we easily get to 20 billion in free cash flows by 2024. The current free cash flow yield is 6%, we can estimate the market cap of 300 billion divided by 1.9 billion shares as they have added shares, it results in a stock price of 157 dollars. Add the 2% dividend you'll probably get, you have a return off, a good return for a great business of 9%. Not bad. However, from a business perspective, Disney's current market cap is 166 billion, is what you paid 200 billion when they merge with Fox when they acquire it. So the current return is 6%. Of course, it depends on the growth, if you think the growth will be there, then it will easily lead to a 9%. But the bottom, let's say the current return with ups and downs in a negative scenario is 6% to 9%. And here I must say, okay, Buffett, Bot, Coca-Cola, when the yield was 9% because it was expected to grow in the future, so a great business. So I'm really putting Disney on my covered stock list of great businesses. I don't have a position yet, but I want to have a list of 30 such businesses and then simply buy when those are sooner or later, rarely, but they will come to a great price. Let's see the other two scenarios. The positive scenario, let's say that Disney that has much more diversification and a stronger brand than Netflix manages to get to 25 billion in revenue over the next five years, adds 10 billion, that's just from DTC revenue, adds 10 billion in free cash flows, 5 billion from other things and we are at 25 billion in free cash flows. Multiply that by 15 and we have a market cap of 357 billion, for let's say almost 200 stock price. This is a 12% return, 14% if we add the 2% dividend. From a business perspective, this positive scenario might, might happen. So very good outlook for Disney. Recession, ups and downs, customer preferences, movies coming out, success of those movies, all to keep in mind. Then I created just an exuberant scenario, let's say that Disney becomes a growth stock, light Netflix gets a price earnings ratio of 25 and reaches a capitalization of 625 billion. If it grows 14%, the cash flows grow 14% up to 2025 and then 5% in the future. That is also a possibility one has to take into consideration. So to conclude, I really think, okay, this looks like a great business, strong brands, but it meets a lot of the criteria for Warren Buffett's buying. Perhaps maybe it is borderline on one criteria and that is why Buffett still didn't buy. The current 6% cash flow yield increase that makes, I think Warren look at this, but still wait, okay, let's wait for a better entry point. Because it hits, yes, it is a good business, one can understand favorable long-term prospects, free, operated by honest and competent people, for it's not a very attractive price. Tomorrow I'll make a video on 1997 Berkshire Hatterer letter to shareholders where I got this excerpt. So I think that Warren Buffett wants an 8%, 9%, 10% free cash flow yield like he is getting with Apple, which is perhaps in his eyes also a great business. So we have to follow Disney and perhaps it will hit that 8%, 9%, 10% free cash flow yield, giving us the upside for the growth. If you follow 30 great businesses, I can guarantee you that once in a year, one of those 40 businesses will hit a very, very attractive entry price due to whatever reason. If Disney doesn't gain traction immediately or the costs of DTC are very high in the next year, then we might see it drop at a greater free cash flow yield and that's what I'll be waiting for. However, in April they will announce their products, they will disclose them the growth they expected in the investor conference they are preparing that might turn the perspective from a cash flow great business to a growth stock like Netflix and then you might see the stock go and say bye-bye. But that's always a risk when you're waiting for very, very attractive stock prices. Just to note that the price to cash flow was around 10% in 2009, 2010, 2011. So it might come there again. Thank you for watching. Subscribe to my YouTube channel for more analysis of great businesses and not so great but perhaps interesting businesses. Subscribe to my weekly newsletter on my blog in the link in the description below where I will send out each Sunday the overview of the analysis of the articles of the video that I made so that you don't miss the most important content for you. Looking forward to your comments and I'll see you in the next video.