ESPN Woes Don’t Dampen Disney Stock (DIS)

While Disney’s (DIS) ESPN may be strained by the pressure to resort to layoffs, Disney stock itself is still healthy. In fact, DIS stock is arguably a good buy after recent selloffs.

ESPN Woes Don't Dampen Disney Stock (DIS)ESPN’s plan is to cut about 300 employees (roughly 4% of its workforce) of its 8,000 employees, as it struggles to compete in a media landscape that is increasingly favoring new content platforms and new cable bundle models. 

The evolving pay-TV landscape has forced ESPN — which calls itself “The Leader in Worldwide Sports” as it airs in more than 80% of U.S. households — to reorganize its operations in a move toward digital. Amid a merger-heavy cable television company environment, ESPN is consolidating its teams to better compete against a smaller number of much larger companies.

How This Affects Disney Stock

Disney owns a majority 80% stake in ESPN, with Hearst Corporation owning the other 20%. According to the Wall Street Journal, “a person close to ESPN” says the layoffs will affect nearly every department, including advertising, technology, administration and content. 

“The demand for sports remains undiminished, though the landscape we operate in has never been more complex,” said ESPN President John Skipper in a letter to employees.

ESPN is trying to compete amid a cord-cutting culture in which many cable providers have begun offering “skinny bundles” that are less expensive and smaller versions of the traditional cable bundle. While there very few subscriber numbers out on these skinny bundles, ESPN is typically excluded from them.

Media consumers are also moving toward other online streaming services like Netflix (NFLX) and Amazon (AMZN) Prime instead of cable.

Despite the news, Disney stock was trading up as high as 1.4% in Wednesday’s session, and is up 60 basis points as of Thursday’s early trading, proving resilient to the pressure at ESPN, which is but one of a wide range of revenue sources — from theme parks to blockbuster films — for a media behemoth like Disney.

Disney has little to fear over losses at ESPN. Star Wars VII: The Force Awakens (scheduled for release Dec. 18) promises a windfall of profits from its die-hard fan base. Although, that’s not to say ESPN is insignificant. Cable networks contribute to about 50% of Disney’s overall operating income, and ESPN is its biggest player here.

But despite ESPN woes, Disney stock is arguably offering investors an opportunity for a good buy now amid the recent downswings in the market. Disney stock is up about 18% year-to-date, saddled with a price-to-earnings ratio of 23.1; fairly healthy compared with peer Time Warner Cable’s (TWC) valuation of 26.3.

During Disney’s second-quarter results, in which revenue narrowly missed analysts’ marks, Disney CEO Robert Iger acknowledged the declining subscriber base at ESPN, but said Disney would not yet move toward Internet offerings as other media companies have, saying he did not foresee significant declines in cable subscribers numbers in the next few years.

Disney will report third-quarter earnings Nov. 5.

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