It’s going to take a lot more than a box office record and ratings coup for the NBA finals to change the fortunes of Walt Disney Co (DIS), but it’s hard to imagine a better weekend for DIS stock.
As well as many of its major divisions are performing, the market can’t get past cord-cutting fears surrounding ESPN. Fair enough. If Disney has a single glaring weakness, it’s this.
The parks and resorts, studio entertainment, and consumer products segments are important to Disney, but nothing swings DIS stock around more than its media network segments. In turn, nothing affects cable networks’ results like ESPN.
The problem for Disney is that the number of cable subscribers is in decline, and even those who do keep cable are opting for cheaper packages that don’t include the sports channel.
At the same time, ESPN is paying eye-popping amounts of money for the rights to live sports programming. Sure, ESPN is still very profitable, but the trend is not its friend.
This trend has investors rightly concerned about what this all means for DIS earnings over the longer term. As much as its blockbuster movies may get all the glory, the media networks are more important to results.
In the most recent quarter, the division that includes ESPN accounted for 45% of DIS’s total revenue and 60% of total operating profits. Indeed, media networks generated more operating profit than parks and resorts, studio entertainment, consumer products and interactive combined.
And a lot of that is carried on the back of ESPN.
DIS Doubles Down
Shareholders should be delighted with the NBA finals this year, which set a record for an NBA broadcast on ABC and ranks among the highest-rated sports telecasts on ABC or ESPN. The cable network carried more games on its ESPN/ABC schedule and they were mostly ratings gold.
At the same time, Finding Dory more than made up for the bomb that was Alice Through the Looking Glass. Disney-owned Pixar’s sequel to Finding Nemo set a box-office record for an animated film, with a $136.2 million opening weekend in the U.S. and Canada. The previous champion was Shrek the Third which grossed $121.6 million almost a decade ago. DIS also set a personal record, with Finding Dory topping the $110 million opening for Toy Story 3 in 2010.
The bottom line is that Disney closed the NBA season with a slam dunk and started the summer movie season in unprecedented fashion. After missing Wall Street’s earnings estimates in three of the last four quarters, DIS has a fighting chance of exceeding forecasts, which are likely to remain on the pessimistic side.
The secular drag of cord-cutting will continue to weigh on sentiment for DIS stock, but the NBA finals are a reminder that ESPN is still the king of live programming and the studio segment ain’t half bad either.
As of the writing, Dan Burrows did not hold a position in any of the aforementioned securities.
