It’s a raining in the “Magic Kingdom,” and if the bears are correct, the storm is just getting started.
Shares of Walt Disney Co (NYSE:DIS) took a relatively sizable hit of more than 1%. Of the 112 down days incurred this year — and there’s been more of those than of the opposite variety — Monday’s losses place it just outside the bottom 20.
That’s not the most encouraging news for DIS stock holders, which has been one of the more remarkable turnaround stories. Is the magic finally fading for Walt Disney Co?
ESPN Is in Hot Water
If you’re a big sports fan, the writing appears to be on the wall for Disney stock.
The overriding concern this year, as reported by InvestorPlace contributor Lawrence Meyers, is subscriber loss for ESPN. DIS stock has generally built a string of solid earnings performances, backed by top-line sales and operating margin growth. But the bottom line has been a tricky issue. You can see that the magnitude of positive earnings surprises are waning over prior years. Without addressing the ESPN fallout, Disney stock could be stuck in limbo.
The latest read on sports coverage does nothing to assuage those fears. It’s no secret that the National Football League dominates the media. Of the 50 most watched sporting events halfway through 2016, NFL playoff games took all the slots from the top ten. Major League Baseball’s “All-Star Game” came in at number 42. So it was a surprise when game five of the MLB’s World Series beat out a Sunday Night Football matchup. This was the first such beat by MLB since 2011. It also sends a scary message to DIS stock investors.
ESPN can’t survive without a booming NFL. And if ESPN continues its downward trek, Disney stock will feel the heat. For all of its wonderful, envy-inducing international brands, sports remains the most profitable business for Walt Disney Co. Naturally, people are going to freak out, and I don’t necessarily begrudge them for that.
DIS Stock Is Still in the Fight
There’s a time and place for everything. But jumping to conclusions about a company as big and influential as Disney would be a critical mistake. True, the ESPN subscription numbers don’t look great, yet recent statements from Walt Disney Co refute the severity of those declines, citing unusual variance in the latest figures. As a result, Nielsen — the television ratings agency — retracted its report that ESPN lost 621,000 subs in October.
That’s a remarkable concession by Nielsen, thus fueling more fire into the controversy. For its part, FBR Capital Markets is refusing to take the bait. They’re maintaining a “market perform” rating on DIS stock with a $107 target, or a 15% premium over current value. Analysts there are recommending investors to focus on the bigger picture for Disney stock.
And that’s exactly what needs to be done. The challenge is a steep one, since viewership for professional sports are declining everywhere. However, I refuse to believe that Walt Disney Co doesn’t have some kind of plan to address this issue. Even being forced into a deal with Twitter Inc (NYSE:TWTR) — thanks to the buyout of Time Warner Inc (NYSE:TWX) by AT&T Inc. (NYSE:T) — isn’t the end of the world for DIS stock.
At the end of the day, Disney’s rivals will need to show up. That’s far from guaranteed, as the media environment is tough on all comers. The AT&T-Time Warner merger also needs to meet regulatory approval — again, not a guaranteed event.
Walt Disney Co (DIS) Is in a Class of Its Own
With immediate obstacles always drawing our attention, it’s easy to forget that DIS stock has faced much more severe dilemmas in the not-too-distant past. About a decade ago, Walt Disney Co faced the very real risk of self-implosion. But under the leadership of CEO Bob Iger, the entertainment giant brought back that loving feeling.
Aside from rough patches in the 1970s and the 2000s, losses for DIS stock are sparse. Going back to 1962, the company has only produced 15 annual losses, including 2016 as an assumed loss.
That gives Disney stock a 72% probability that, on any given year, investors can expect to see a positive return. In fact, that’s better odds than Wall Street favorite Apple Inc. (NASDAQ:AAPL), where investors have a 65% chance of success.
Ultimately, a case can be made that DIS stock suffers from “good” problems. No one else has the media portfolio that it possesses by the bucket load.
Some of these brands, like Star Wars, are perpetual money-making machines. Nothing, not even George Lucas directing his own movies, can change that.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.