ESPN: Time to Get Off the Disney Bus?

ESPN continues to be the shining star in Disney's empire.

     

21st Century Fox’s (FOXA) Fox Sports 1 entered the cable sports fray Aug. 17, and immediately, investors wondered what this meant for ESPN and Disney (DIS), its majority owner.

Last November, I argued that Disney should spin off its sports network. Almost a year later, the competitive landscape has clearly changed. And that raises a few questions:

How’s Disney’s Business One Year Later?

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If Disney’s stock price is any indication — up 30% year-to-date vs. 18% for the S&P 500 — the Magic Kingdom is doing just fine.

For the first nine months of 2013, DIS’ studio entertainment division increased revenue 1% year-over-year to $4.47 billion with a 14% decrease in operating income to $553 million. Sure, there were some flops along the way, but the movie business is a small portion of Disney’s overall revenue. As long as the division is making money, I’m sure CEO Bob Iger can live with some variability in its revenue and earnings.

Disney’s cable networks continue to be the driver of growth, not just with ESPN but also A&E Television Networks, which airs the hugely successful Duck Dynasty. The success of AETN and ESPN gives Disney a one-two punch in the TV wars. From a profit perspective, it doesn’t get much better — revenue for its cable networks in the first nine months increased 8% year-over-year to $10.9 billion, with operating income up 10% to $4.8 billion.

Keep in mind that Disney owns just 50% of A&E Networks (Hearst the other 50%) and 80% of ESPN (Hearst owns the remaining 20%). That’s exceptional performance considering DIS has partners to deal with.

Even its parks business is performing at an exceptional level. Revenues increased 9% year-over-year in the first three quarters, up to $10.4 billion. Operating profits jumped 17% to $1.6 billion. The U.S. economy might appear sluggish, but business at Disney’s domestic parks and resorts has been solid throughout this fiscal year.

The company has spent heavily to upgrade its properties, and now that the major expenditures are done, its free cash flow is expected to grow exponentially. For the first nine months of the year, its free cash flow was $4.9 billion — 37% higher than a year ago. Expect its full-year free cash flow to be around $5.7 billion.

One year later, all’s well with Mickey.

Should Disney Be Worried About Fox Sports 1?

Well, they do have Jay Onrait and Dan O’Toole, Canada’s latest exports to the US entertainment industry. The two sports broadcasters were hugely popular on TSN, Canada’s version of ESPN. So far, it appears they’ve done a good job making sports news fun, and Americans seem to be accepting their brand of humor. Whether they can take enough viewers from SportsCenter to make it a real competition is anyone’s guess.

 
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