TIP610: Mastermind Q1, 2024 w/ Tobias Carlisle and Hari Ramachandra

Episode Summary

Executive Summary: The episode centers on a value-investing debate about Disney, contrasting a skeptical but still constructive long-term bull case against concerns over debt, streaming profitability, cultural controversy, and declining creative momentum. The hosts also discuss macro uncertainty, then compare Disney’s durable brand/IP flywheel with Spotify’s growth-versus-profitability story and Toby’s quantitative deep-value pick, Mueller Industries.

Main Topics: Macro uncertainty and why value investors often ignore it: The discussion opens with skepticism about forecasting the macro environment, citing yield-curve inversion, recession risk, deficits, and an election year as reasons that top-down calls are noisy and often unhelpful for stock picking. Disney’s turnaround thesis: Hari presents Disney as a beaten-down but high-quality franchise whose parks, streaming, studios, and consumer products could form a powerful flywheel if management executes better and costs are reduced. Moat durability vs. erosion at Disney: The panel debates whether Disney’s moat is still intact or gradually eroding due to competition, IP aging, succession issues, culture-war exposure, and weaker Marvel/creative output. Disney valuation and capital structure: Toby pushes back on the bull case by noting that Disney is not cheap on current metrics, has added shares and debt, and needs meaningful improvement in earnings and margin expansion before becoming attractive. Spotify as a high-growth, hard-to-value platform: Stick pitches Spotify as a long-term growth story driven by user growth, monetization, podcasts, and audiobooks, while Hari and Toby focus on its lack of profitability and dependence on major platform partners and competitors. Mueller Industries as classic quantitative deep value: Toby closes with Mueller Industries, a simple, cash-rich industrial business that screens extremely cheap on EV/EBIT and other multiples, with the main question being cycle sustainability rather than business quality.

Key Arguments: Macro predictions are too unreliable to drive investing decisions; staying fully invested in cheap assets is preferable to trying to time recessions. Disney still has a strong moat because its parks and IP are hard to replicate and its brand has multi-generational resonance. Disney’s turnaround depends on reducing waste, improving creative output, and making streaming and parks work together as a flywheel. The bull case for Disney is stronger than the bear case because the company has enduring brands, global reach, and monetization channels across parks, streaming, and merchandise. The bear case for Disney is that streaming competition is intense, content is expensive, debt is high, and current valuation leaves little margin of safety. Spotify has extraordinary user growth and engagement, but profitability is still unproven because the company relies on external content creators, distribution platforms, and tech infrastructure. Spotify’s podcast and audiobook businesses may improve margins over time because they are more scalable than music, and advertising monetization is becoming more sophisticated. Mueller Industries is attractive because it is cheap, cash-rich, and operationally resilient, but its recent earnings may have been boosted by temporary housing-cycle strength and weak Chinese competition. Toby’s investment style is to buy baskets of cheap businesses rather than rely on narrative precision, because valuation factors tend to work across long periods even when individual outcomes are uncertain.

Data Points: 10-3 yield curve inversion examples: About 8 since 1962 - Toby cites the historical record of the 10-year minus 3-month curve inversion as a recession signal. Yield curve inversion duration: Longer than any prior period - He says the current inversion has been both deeper and longer than historical precedents. Disney free cash flow: Down from $6B–$7B to about $1B during COVID; now around $4.8B - Hari describes the pandemic collapse and partial recovery in Disney’s cash generation. Disney market cap: About $170B–$180B - Hari notes Disney’s current scale and possible acquisition appeal. Disney theme parks revenue: About $23B–$24B in 2023 - Hari compares Disney’s park scale to Universal’s. Universal Studios theme parks revenue: About $8B - Used to illustrate Disney’s park leadership. Disney+ market share: About 16% - Hari says Disney+ ranks behind Netflix and Prime Video. Netflix market share: About 24% - Used as the benchmark for streaming competition. Amazon Prime Video market share: About 21% - Used in the streaming landscape comparison. Disney annual park expansion spend: $3B–$4B per year - Hari says Disney plans significant ongoing park investment. Disney EPS peak reference: $6.26 in 2018 - Hari argues a return to prior earnings could support a much higher stock price. Disney current valuation: About 2x revenue and roughly 18–20x earnings if EPS recovers - Hari outlines his bull-case multiple expansion scenario. Disney current share price at recording: $93 - Toby references the stock price during the valuation critique. Disney shares outstanding: Roughly 1.8B, up from 1.5B–1.6B - Toby notes dilution after COVID-era share issuance. Disney annual revenue in 2023: $89B - Toby uses this to argue Disney is a much larger business than in earlier years. Disney current market cap / activist stake: Nelson Peltz through Trian: about $3B stake - Toby references the activist campaign and proxy battle. Disney cost-cutting target: $7.5B - Hari notes Disney’s cost reduction program exceeded the initial target. Disney streaming profitability target: 15%–20% margin by 2027 - Mentioned as Peltz’s target and a key debate point. Disney+ retention rate: 78% - Hari cites retention to support subscription stickiness. Netflix retention rate: 72% - Used for comparison with Disney+. Spotify monthly active users: 574M - Stick uses this as the current scale of Spotify’s user base. Spotify premium subscribers: 226M - Used to frame monetization progress. Spotify user target: 1B users - Stick states Spotify’s publicly stated long-term goal. Spotify revenue per user target: 100 euros annually - Stick says this is an ambitious monetization goal. Spotify current revenue per user: About 4–5 euros - Used to illustrate how far monetization still has to go. Spotify market cap: About $40B - Stick frames the company as a growth stock with large upside if execution continues. Spotify ad spend: 13% of revenue - Stick says the company is still investing heavily to drive growth. Spotify gross margin premium subscribers: 29% - Hari cites current margin levels in the financial statements. Spotify gross margin free subscribers: 8% - Used to explain why reported margins look low. Mueller Industries market cap: $5.3B - Toby’s quantitative deep-value pick. Mueller Industries cash and equivalents: $1.1B - Toby highlights balance-sheet strength. Mueller Industries enterprise value: $4.2B - Calculated after subtracting cash from market cap. Mueller Industries EV/EBIT: Under 5x - Toby’s preferred valuation metric shows it as very cheap. Mueller Industries price-to-cash-flow: About 8x - Additional support for cheapness. Mueller Industries P/E: About 8.5x - Shows the stock is inexpensive on earnings. Mueller Industries P/B: About 2.4x - Another valuation metric Toby references. Mueller Industries return on assets: High 20s to low 30s over ~5 years - Toby says it is a quality business despite the low multiple. Mueller Industries business mix: 46% piping, 31% industrial, remainder climate - Segment breakdown discussed in Toby’s pitch.

Pivotal Quotes: "I think that the macro picture is incredibly confusing to very bearish." — Toby: Explaining why he prefers to ignore macro and stay invested in cheap stocks. "I think they’re trying their very hardest to kill it." — Toby: His blunt assessment of Disney’s management and culture-war exposure. "The company that doesn’t control its own distribution... they are left with nothing right now, basically." — Hari: A critique of Spotify’s dependence on outside platforms, labels, and tech providers.

Implications: The episode reinforces that long-term returns may come from durable franchises and cheap balance sheets, but execution matters. Disney needs stronger creative and financial discipline; Spotify must prove monetization; Mueller looks like classic cyclical value with limited downside.