Disneyland's Sleeping Beauty Castle
Courtesy of Disney Enterprises, Inc.
By Jonathan Funke
August 11, 2015

The punishment meted out against Disney—until last week, the year’s top performer in the Dow—suggests that revenue growth remains king in a sluggish investment world, with disappointment sending even the bluest of chips to the penalty box.

No matter that, despite a strong dollar, Disney’s (DIS) third fiscal quarter profits of $1.45 per share beat expectations handily or that its revenue still gained 5%. ESPN seems vulnerable to Millennial cord-cutting. End of story. Disney’s stock is currently down by about 10% from where it was right before its August 4 earnings release.

But Disney’s stock drop didn’t have to do with growth per se. It has to do with the type of growth investors thought they were paying for. As with politics, it’s all about what kind of candidate you’re looking for.

Disney is supposed to deliver safe, steady upside surprise. Investors came to value that promise highly, pushing the entertainment giant’s P/E multiples well into the 20s—not outlandish for a young Turk, but something of a premium for a stodgy establishment player. Like early backers of Jeb Bush, many now feel they overpaid for a sense of security that suddenly seems at risk.

At the other end of the industry (and revenue) spectrum, Netflix (NFLX) investors still think in terms of user growth. Never mind that well-funded competitors are gathering steam, or that there’s no end in sight for the streaming platform’s royalty obligations—including those Netflix owes to Disney itself. Like Donald Trump, Netflix investors play by incubator rules.

Also like Trump, they’re clearly winning by those rules. It’s Dot-Com 2.0: confidence in the opportunity of a disruptive player grafted onto a credible business model. These investors expect that Netflix will follow in the footsteps of Amazon, which, after 20 years of razor-thin margins, last quarter proved it could flip that profit switch after all.

If Scott Walker is your guy, give Facebook (FB) a look. Hard-charging Mark Zuckerberg is investing for growth in areas that may seem far-flung from its core mission at times, which has created some bobbles in the stock. But such investments have been on the back of strong profit generation, and Facebook investors have generally come around, even at 100 times earnings. Compared with others in this mercurial space, Facebook is downright mainstream.

Hillary backers should rally to Google (GOOGL) (or Alphabet, as of Monday’s announcement). It’s twice Facebook’s age and market size, and commands just one-third the growth rate and earnings multiple. The company’s stock price pop in July didn’t come from driverless cars, but from proof that their new CFO could tamp the brakes on their famously spendthrift ways. The mature innovator, and still the consensus winner in the online ad space, has plenty of cash on hand, and enjoys P/Es in the low 30s.

 

The same day that Google soared, an even more mature innovator, GE (GE), got props for (finally) making headway back toward its core business. The GE investor is looking for disciplined growth, not headlines. Like John Kasich—“rhymes with ‘basic,’” the Ohio governor likes to say—GE has earned investors’ trust steadily over the course of decades. Both man and corporation point to their Jack Welch-era successes as evidence of future reliability.

Like their political doppelgangers, these companies are forward-looking enough to grow, but mature enough for us to judge how they might do it. Other companies don’t have the luxury to choose and, like desperate candidates, must resort to other ways to woo our attention.

A determined player in an upside-down industry, Royal Dutch Shell (RDSA) has announced significant job cuts. This has helped the company keep its head above water alongside the ever-lurking, best-in-class ExxonMobil (XOM), even as Conoco sank with the rest of the sector. (Bernie, Biden, and O’Malley, respectively.)

P&G (PG) made headlines recently for paring down its business lines but, like Rick Perry or Lindsey Graham, it wasn’t enough to stay in prime time. We all need to eat, so this corporate fixture will stick around a while longer. Just don’t expect those multiples to go beyond 20 any time soon.

It’s unclear what these companies will make of themselves. Disney just upped its stock buyback program from $4 billion to $6 billion, even as it cut some high-profile talent costs at ESPN. Like Bush, the giant of family-friendly entertainment is biding its time in hopes that competitors will flame out and that their customers will come around to the familiar name associated with so many diverting stories.

Disney investors should have seen the setback in subscribers coming. (Netflix investors did.) But their real mistake wasn’t in misjudging the company but in putting the wrong premium on it. We’ll see how they feel in December, when the latest Star Wars installment may offer a new hope. Those who were nervous ponying up for Disney at multiples in the mid-20s may return to it gladly in the high teens. And as the presidential field narrows, many portfolios might welcome the company that gave the world Six Sigma—particularly if Netflix starts to look like a bad slate of reruns.

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