It’s been a rough year for Walt Disney (DIS).
Is it still a buy?
What’s going on in Mouse Land? It’s not a simple answer.
In a nutshell, Disney is engaged in a tug-of-war for its soul using the proxies of Star Wars and ESPN.
How this little skirmish with a big price tag plays out may mean the difference between stock gains and losses, not to mention billions in revenues and earnings.
Let’s take a look and see how this might play out for shareholders…
Disney Buys a Megabrand
Not too long ago (2012 to be exact), in a galaxy we’re all aware of, Disney paid $4 billion for the rights to George Lucas’s franchise and global icon, Star Wars. Along with the price tag came LucasFilms, too.
It was, by any and every stretch of the imagination, a brilliant stroke.
Disney released Star Wars: The Force Awakens just before Christmas 2015, and has already broken dozens of records.
In fact, it’s already the highest grossing movie (not adjusted for inflation) of all time in the United States.
Add in foreign revenues of over $1 billion and you have a blockbuster of epic proportions.
What does that mean for Disney’s legendary branding ability?
Plenty…
Disney World’s Theme Park Gets a New Start
Disney World’s Hollywood Studios (Florida) is the least-visited park in the Disney World orbit. In order to boost its appeal, Disney will carve out a vast piece of the park specifically for Star Wars Land.
Disney will also open a similarly themed portion of Disneyland (California) to take advantage of the brand.
Just imagine the branding and merchandising opportunities for Disney in these new
themed portions of their flagship parks.
According to Aswath Damodaran, a New York University finance professor, every $1 of film revenue is worth $1.80 in toy merchandise revenues.
In addition, Damodaran estimates every $1 from the movie translates into $1.80 in streaming revenues.
You can either do the math yourself or simply go to professor Damodaran’s analysis, which indicates the value of Disney’s investment in the Lucas franchise at $10 billion.
Any way you look at it, the Force is with Disney when it comes to this franchise, and a good chunk of Disney value will be driven by its success.
Which brings us to the Dark Side of Disney’s fortunes today…
ESPN Rising
Back in 1984, television and media giant ABC acquired the fledgling ESPN, a sports and entertainment up-and-comer available only on cable television.
When Walt Disney bought ABC’s parent (Capital Cities Communications) in 1995, ESPN became a subsidiary of Disney.
Make no mistake about it: ESPN is a huge star in the Disney galaxy.
It became a major player in the sports broadcasting industry through shrewd negotiations for rights fees, a keen eye for extraordinary on-air talent, brilliant production of pioneering shows like Sports Center, GameDay and Pardon the Interruption, and the sheer size to bid successfully for programming that sells: the NBA, the NFL and NCAA college basketball, in particular.
Forbes estimated ESPN’s recent value at $50 billion, and it became the largest cash flow contributor to the Disney coffers. No surprise there, since ESPN is the most expensive network for carriers.
But — and this is a HUGE but — the cost to carry all the programming and keep the talent is exorbitant.
With the cable industry changing, ESPN losing its customer base (7 million subscribers lost over the last 2 years), and its cost beginning to soar, Disney has forced ESPN to change its model a bit.
Indeed, Disney management told ESPN it had to “trim $100 million for the 2016 budget, and $250 million in 2017” as reported by CNN.
And it’s ugly…
Talent Losses Drain ESPN
ESPN laid off over 300 employees at its Bristol, Connecticut headquarters back in October.
Along the way to that mass layoff, it has severed ties with some serious on-air talent: Bill Simmons, Keith Olbermann (again), and Colin Cowherd were all allowed to walk.
ESPN’s also looked for ways to save money in other ways.
A planned move of the daily Mike & Mike show to New York City’s Time’s Square was shelved, changes to the SportsCenter franchise have cut some two hour shows in half, and changes to the GameDay product were made (at least in part) to cut costs.
And cutting costs is one of the keys to ESPN’s future. Take a look at this chart, courtesy of SportsBusiness Daily Journal:
ESPN’s list of sports programming is indeed impressive, but its costs to keep up the fees is even more impressive, if not daunting, for a future model that looks just a bit cloudy today.
Each new deal referenced has seen double- and in some cases triple-digit increases in prices. It’s not a stretch to suggest that the networks and cable broadcasters will either have to cap fees in the future, or at least pick and choose even more carefully what they will carry, and how.
Now here’s what analysts have to say about Disney stock…
Analysts Weigh in on DIS Stock
The bigger question, of course, is how to view Disney stock given the Star Wars and ESPN situations.
For the most part, the analyst community is mixed.
According to NASDAQ.com, of 26 rating firms 9 have DIS stock as a “strong buy,” while 3 recommend a “buy,” and 11 recommend DIS as a “hold.”
Over at Yahoo Finance, its “Mean Recommendation” ranks DIS stock as a 2.4 out of 5 (strong sell), with a mean target price of $116.39, a nice hike from its recent levels.
Clearly the market has no real conviction on DIS stock.
However, since I own the stock, I say, “I’m not going anywhere on my investment or belief in The Mouse.”
Sure, the ESPN problem is a sticky wicket. The media world and, in particular, the cable models are changing all the time.
Is Disney a Buy?
It’s super competitive out there…
Netflix (NFLX), Hulu, Apple (AAPL) TV, Roku, and Google (GOOG) are all in the game, each trying to find new ways to manage content, pricing, and eyeballs on their screens.
But make no mistake: Disney will ride hard on ESPN until it finds the right mix of broadcasting rights, programming, personnel, and expenses—and ESPN won’t go away anytime soon.
As for Star Wars, its new presence in the Hollywood theme park will be a huge deal. Guests will come in hordes, all the while buying up as much merchandise as they can carry out of the park.
The fact is, with both the Star Wars franchise and the ESPN brand, Disney isn’t really at war with itself, but merely building on its future.
Bottom line: Buy it!
This post originally appeared in mainstreetinvestor.com.
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