Commentary around ESPN will be the key driver for Walt Disney Co stock after the earnings.
Media and entertainment giant Walt Disney Co (NYSE:DIS) is scheduled to report its third quarter FY 2017 earnings on Tuesday, 8th of August. As has been the norm over the past few quarters, the commentary on ESPN will be the focus of the earnings and will be the key driver of the post earnings movement of the stock. Cable network segment, which mainly comprises of ESPN, contributed almost 30% of Disney's revenues and 33% of its total operating profit in the first six months of this fiscal year. Given this strong contribution of the ESPN franchise, it is natural that any news on this front will have a significant impact on Disney stock.
Source: BI Intelligence
Sadly for Disney, the news on the ESPN front has not been good for a while. The cable TV and broadcast networks have been hit hard by the cord-cutting going on currently with millions of subscribers switching over to on demand TV, live streaming and 'slim bundles'. The premium sports franchise has been bleeding subscribers over the last few years. Many consumers are shifting to skinnier bundles which more or less allows them to pay for what they watch and several of them are dropping ESPN. Then there is the rise of streaming services such as Amazon who are also vying for streaming rights for major sporting events.
Amazon recently paid the National Football League roughly $50 million for rights to stream 10 Thursday night games this season. The company also outbid Sky Sports for the UK telecast right of all ATP events (this covers most of the big men's tennis matches, except the Grand Slams). Amazon is reportedly paying 10 million pounds per year for this deal. The company is also in the race for streaming rights for other sporting events. Amazon also has the rights to live audio-streaming of Bundesliga football commentaries in Germany, available through its Amazon Music service. More people are cutting their cords and subscribing to streaming services such as Netflix and Amazon Prime Video. Nearly half (48%) of US internet users surveyed in June 2017 said they live stream video at least once a week.
Heavy subscriber losses.
According to Nielsen, ESPN has lost more than 13 million subscribers in recent years, from a peak of about 100 million in 2011 to less than 87 million today. Also, subscribers are tuning in less frequently to watch sporting events and highlight shows. Even ESPN's flagship sports news program, SportsCenter, has seen its audience decline sharply over the last decade.
ESPN worries have been a cause of concern for a while. Macquarie Capital lowered its rating on Disney stock to neutral from outperform because it predicts the company's earnings will miss Wall Street expectations next year due to ESPN subscriber losses. "Disney's cable net exposure and outsized sub declines at ESPN have again become a focal point in investors' minds. Advertising was also soft in calendar Q1 (Disney's F2Q). We don't see much near-term scope for either to pick up," analyst Tim Nollen wrote in a note to clients. The analyst reduced his 12-month price target for Disney stock to $105 from $125.
Disney has been taking several steps to allay investors fears. Disney has made a foray into live streaming and has partnered with OTT players. Disney has also partnered with AT&T's OTT service DirecTVNow. ESPN and other Disney channels are also part of the recently launched YouTube Live TV service. Disney acquired a 33% stake in the sports streaming site BAMTech with an option to increase its stake. And some analysts believe that this will offset subscriber losses to a large extent.
Rising content cost.
While on one hand Disney is bleeding subscribers, on the other hand, the programming cost is rising. ESPN and Turner Sports signed a new deal with NBA according to which they are paying NBA $2.6 billion per year. This is 180% jump from their previous contract with NBA. The content price has increased for other sporting events as well. This is squeezing the cable network segment. In the first six months of fiscal 2017, Disney's cable networks operating income slipped 6% year over year. The company has taken several measures including laying off hundreds of staff to control costs. Disney has also been able to hike ESPN subscriber charges. However, the combination of declining subscribers, rising content costs and strong growth in other segments has decreased the size of ESPN's contribution to Disney's operating profit.
On the top line front, Wall Street expects the House of Mouse to report revenues of $14.43 billion, slightly higher than what the company had reported last year. Analysts expect Walt Disney to report an EPS $1.56, down from an EPS of $1.62 the company had reported in the third quarter last year. Earnings estimates have been trending down over the last three months. EPS estimate has come down from $1.7 ninety days ago to the current estimate of $1.56, a decline of 8%.
Walt Disney stock remains a good buy.
ESPN concerns and the declining earnings estimates have been a drag on Disney stock. Walt Disney stock is down over 5% YTD and around 3% in the last three months. The stock was down almost 8% since its second quarter earnings on May 9th. However, it has made a strong recovery in the last one month. Disney stock is currently facing resistance from its 100-day simple moving average. While ESPN is still a cause for concern, Disney's other business segments are doing extremely well. It's Parks and Resorts and Studios segments are churning record profits. Disney's Shanghai theme park is seeing strong traction and the company has a very strong movie slate for the year. Disney stock still remains a good buy.
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