Is It Time To Sell Walt Disney Co (DIS) Stock In The Face Of New Challenges?

  • Disney faces a massive increase in NBA costs as the new season and deal terms take effect in October.
  • Disney is expected to incur $650-$750 million of incremental cost over the next few quarters related to the NBA contract.
  • Other challenges like subscriber attrition risk, difficult studio comps, and Shanghai costs are likely to also weigh on EPS growth.

Walt Disney Co. (NYSE:DIS) faces a massive increase in NBA costs as the new season and deal terms take effect in October.

The NBA has gone through five TV rights renewals since 1990. The deals have gotten longer but they have gotten disproportionately more expensive. Deal length has more than doubled while deal payments have increased over 2600%. The average price per season has gone from $219 million in 1990 to almost $2.7 billion for the new season (an 1100% increase).

DIS stock chart

Source: Walt Disney Co stock price chart by amigobulls.com

Disney airs the majority of the NBA games, about 60%. During the last contract renewal, it paid about $4.9 billion for games over a nine-year horizon, which amounted to $549 million per season. Estimates call for Disney to pay $14.6 billion over the next nine years or $1.6 billion per season. Disney is expected to incur $650-$750 million of incremental cost over the next few quarters related to the step-up component of the higher pricing, which represents about 5% of total company pre-tax income, as the remainder is built in as an annual pricing hike and spread out over the nine-year life of the deal.

Also read: Will Walt Disney Co Stock Fall Below $90?

Other Challenges Could Also Drag FY17 EPS

Aside from concerns about sports cost, Disney faces other challenges pressuring the FY17 EPS outlook, specifically tied to subscriber attrition, difficult studio comparisons, and the Shanghai cost burden.

Recent data from SNL shows an acceleration in cord cutting as broadband-only homes grew 16% in 2Q16. Furthermore, recent deals by Liberty Global and Comcast to integrate Netflix are another indicative sign of a global shift in television demand, which is a major secular trend presenting ongoing subscriber attrition risk for Disney.

While without a doubt Disney has a great long-term film pipeline, the near-term picture is shakier because the wildly successful films of last year may be hard to repeat. Disney will face difficult comps based on the success of Zootopia, The Jungle Book, Finding Dory, and Civil War. The studio has some promising 2017 films, including: Guardians of the Galaxy 2 and Thor: Ragnarok, and Beauty and the Beast. Note, Star Wars 8 will not be in FY17. However, two titles in the FY17 backlog have already been receiving mixed reviews—Cars 3 and Pirates of the Caribbean: Dead Men Tell No Tales.

Lastly, the effort to build out the Shanghai Disney Resort is a problematic drag on profitability. It is expected that Shanghai is likely to run at a bigger loss than is anticipated by consensus estimates.

Also read: Can Theme Parks Drive Walt Disney Co Stock Higher?

Conclusion

There is a considerable risk to the FY17 EPS outlook for Disney. The NBA deal renewal takes effect next month. Additionally, other challenges like subscriber attrition risk, difficult studio comps, and Shanghai costs are likely to weigh on EPS growth, which will drag Disney stock price. We suspect P/E multiple compression from 15x currently to 13x and EPS cuts from $6.08 to $5.75 to send the Disney stock price towards $75.

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Comments on this article and DIS stock

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loveprotocal
bullish
This company has record All-Time High Revenues and Profits year after year! You don't penalize or scrutinize a company for breaking all-time high records with this much diversity, long-term investment and versatility! There is only assets here where each division is so multi-faceted and they have so many revenue sources in licenses, brands and franchises to fall back on and sell the rights to. This year it is Election advertising revenue and coverage as well as international Olympic coverage, they had the whole Latin American rights to the Brazil summer games. Espn Monday night football and college football are back with a full slate, Baseball playoffs are starting with popular NBA games on the way! All revenue from advertising was way up for these sports last year and Espn Grew 2% percent on all time highs because of it! If no one is watching you can't demand that kind of revenue! Sports is a bonafide solid industry!Three big movies including a new Disney Princess, Marvels Doctor Strange and another Star Wars all round out this year! Disney is huge international player now and many of its movies are commanding 66 percent of their box office take from foreign audiences! China, Russia, India, Brazil, England, Australia, Japan and Korea and many others are turning out in droves for Disney films and Disney China has really boosted the far east appeal here as well as merchandise sales!! Your talking about a country with 2 billion people! Disney has expanded greatly into the Streaming market with Hulu and Dishes Sling service being big players in both. They have cuts deals with X-box, Microsoft, ISO and Amazon for streaming services and have taken advantage of the smart phone market. They are offering different flexible packages with cable companies and have good promotions and joint ventures with these companies which are phone companies as well. They purchased a big share in the streaming service Bam and have a number of top rated shows on Netflix and are about to offer there new movie material on there. Netflix would be a great purchase for Disney as it already offers a variety of things there and could bring much needed popular cable channels in A&E, Freeform and History as well as popular cable sports channels there in Espn which are sorely lacking! They would boost subscribers with a range of material. Disney is a viable winner right now with so much potential to expand its bevy of assets into so many other areas pieced out!! They just sold the rights to the whole Star Wars movies to the Turner Network TNT for 300 million. Disney is a Cash Cow and one that has a plethora of sources to feed off of!!
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loveprotocal
One other thing that should be mentioned Espn added twice the amount in 15 million new international cable subscribers and plenty of streaming ones as well in that same time period of the so publicized 7 million domestic losses. They also have a successful Disney Direct service going in England. International popularity of Disney is an easy tie-in for Espn and the sports market world=wide is a incredible vast revenue source! Espn has the qualifying rounds for the World cup coming up next year and signed a deal with India to show all major cricket matches the countries most popular game and there version of baseball! If they get Netflixs this thing will expand even more internationally with Netflixs current 80 million overall accounts!
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