- 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).
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.
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.