Booking Holdings versus Disney: Why only one is a buy

Consumers are increasingly becoming choosier about where they are spending their dollars. One arena that could see an impact is leisure spending. In the latest edition of Good Buy or Goodbye, Main Street Research Chief Investment Officer James Demmert says Booking Holdings is a stock worth adding to your portfolio, while Walt Disney may be one you want to skip.

Demmert likes Booking Holdings (BKNG) because of its growth and "consistent" high profit margins. Demmert argues the company has built a "moat" around its business model, building up a "hard-to-penetrate market share." He also notes it has a good valuation. What would make Demmert have concerns about the stock? A recession or pandemic.

On the flip side, Demmert is not a fan of Disney (DIS). One of his big concerns is management, specifically that current CEO Bob Iger may be unable to fix the damage done by former CEO Bob Chapek. Demmert is also concerned about the amount of money being spent on content and thinks the stock is overvalued. He says a couple of things could turn Disney into a buy — a change in strategy or the company becoming a takeover target.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Stephanie Mikulich.

Video transcript

It's a big noisy universe of stocks out there.

Welcome to, goodbye or goodbye.

Our goal is to help cut through that noise to navigate the best moves for your portfolio.

Today works examining your leisure spending dollars.

Where are they going?

Join me here to discuss it, James De Main Street Research Chief Investment Officer.

Good to see again, James.

Thanks so much for being here.

So let's get to the stock you do like first and that is booking holdings as we are still seeing people travel to some extent, the stock has done well over the past year.

So let's get to your case here.

And first of all, it starts with the growth and it starts with the profit margins, both of which are about 20%.

So 20% sales growth, revenue growth we're talking about specifically there, right?

Yeah, and 20% profit margin and a consistent profit margin and which uh in a 20% grower of earnings.

So those two consistent numbers are really one of the things that we think is so fabulous about this company based in Amsterdam.

We're global investors.

So we love looking at the US companies, but also these companies based in Europe, right?

And of course, booking also has a big business here in the US as well as well as globally, a lot in Europe as well.

Um Now there's a lot of places to travel to, to book your travel right now, right?

But you say have built a moat around the business model, explain what you mean there, they really have, you know, in the beginning when they started out, the the big competition was that Google would get in the business.

Amazon, right?

With this tremendous amount of cash flow and they tried, but they were unable.

And over time, uh what's happened is booking has just created what I call a moat, right?

This sort of hard to penetrate market share.

And the more they have this, the more it continues to be uh stronghold what's really interesting about.

Um and I think what creates that mode, it's the ease of use of their web access.

And now they have an A I trip advisor.

Of course, this thing tells you where you want to go, what car you might at least before even your thread count of your sheets.

I mean, it's really pretty amazing.

Well, I like that filter.

I'm gonna have to click on that one the next time I book something.

And then finally, there's the valuation that you're looking at as well and you know that you are seeing that growth that you pointed.

But at what you say is a good valuation.

Yeah, I think, you know, here outside of A I and all this, if you want a consistent grower, that's not a tech stock.

This is a 22 times earnings growing at 20% a year.

I think it's just a really great consistent part of any portfolio construction.

So, as you know, we always like to talk about what could go wrong with the stock and in this particular case, you know, you get another pandemic and travel stops.

That's sort of something you can't control or if we do get more meaning economic slowing, that could be a risk.

Yeah, that's really the risk.

You know, anything that would cause people not to want to get out there and travel.

But right now that is not in the way and hopefully it doesn't come in the way.

Certainly the pandemic, right.

Knock on wood.

Seriously.

And you are a holder of booking both my family and my firm.

Gotcha.

Ok. We eat our own cooking.

Gotcha.

Well, it's good to good to know.

Um let's get to the sack.

You don't like.

This one is quite interesting to me.

It's Disney.

This stock has also done well over the past year in part as the pro battle has been going on.

But in terms of why you don't like it, the first reason is quite interesting to me, Bob Iger came back to the company, but you say some of the decisions made by his predecessor, Bob Chapek did so, you know, took the path company down such a wrong path that they can't be reversed.

What are some of those concerns?

Yeah.

And I think Bob Iger, right.

He's just a fabulous manager.

Uh, and, and he was there for so long, but I even think for him it's, it's too little, too late.

Uh, the previous manager dug a hole strategically and too much time spent and too much money spent that.

I'm not sure that Iger is really the right kind of turnaround guy here, Iger is great at building businesses and being creative.

Now, he's coming and basically trying to pick up the piece and clean it up.

I'm not really quite sure and I don't think shareholders might be either.

Of course, we have Nelson Peltz who came, came in and that made it even more difficult.

So management is the big problem there.

And I'm a real stickler for buying companies with excellent management, with visibility.

This is a bit of a mess when it comes to management.

And one of the messes you contend is what has happened with streaming and sort of the spending on content that the company has done.

Um Is it not sort of paying off for them?

Do you think, you know, it was a difficult, you know, very competitive goal to try to compete with Netflix?

I mean, the monster, not just in the US, but globally and that was really the whole strategic idea behind, behind previous management.

Let's make Disney this very competitive streamer against Netflix.

It, it's just like sending, uh, the Cleveland Browns to play, you know, uh the Kansas City Chiefs.

If you're a football person, it just has not worked.

And the problem is it doesn't look like it's going to work and it's been very expensive and very time consuming.

So that is sort of something I think Iger is gonna have to wrestle with.

And the question is, you know, do they just cut their losses and move on?

Uh or they try to turn it around?

Yeah, I mean, he has sort of tried to trim down the spending and that, but you don't think he's gone far enough again.

Too little, too late.

I, I think is uh is the problem there and then valuation just like we talked about with booking, you think this stock is over value?

Yeah, it's growing at 5% a year, right?

Compared to booking at 20 but it's trading at 25 times earnings.

You know, typically you wanna have pe s equal to the growth rate.

So 25 times earnings and growing at 5% is far, far away.

Uh So that's that valuation proposition doesn't make any sense to us.

So what could go right for Disney and, and you, you pinpointed two things that could potentially go right for Disney and turn this around one of them is that the company changed the business strategy meaningfully and things get better.

The other reason it becomes a takeover candidate, which I, I mean, one of these seems a lot likelier than the other one to, at least, to me it's a Bahama to take over.

I mean, it would take a ton of money.

Uh, and, and somebody who wants to, you know, get involved in that mess.

Uh, but, you know, when we think about, OK, what would make it appealing?

Yeah.

Take over, hard to imagine who the acquirer would be.

I think it's a change of strategy and a significant and dramatic one.

I'm not sure current management ir is really up for that.

It's going to cause a lot of uh conflict.

So, but those are the two things I think that could cause I think if the stock just fell apart, like went down a lot, it could be compelling, but not at, you know, with these levels clearly, you don't own it.

No, we don't know it.

Ok?

Just making sure you're not sure it, we're not sure.

Ok, James, good to see you again.

Thank you so much.

Let's summarize what you're telling folks here by booking holdings.

It's a growth company that's reasonably priced.

It has a well built business model with a good moat.

On the other side, you say avoid Disney, it's falling down the rabbit hole from previous management and the stocks overvalued and it's facing drawbacks as it spent all this on streaming competition.