There’s a problem at the House of Mouse and it comes down to just four letters: ESPN. For Walt Disney Co (NYSE:DIS), the sports network has turned from a major asset into a huge liability. And while it has rebounded off its lows, Walt Disney stock is still down about 5% on the year as investors continue to digest subscriber and viewership issues at ESPN.
But what if, DIS stock investors are digesting Disney’s ESPN issues a tad bit too harshly.
As DIS’ magical nanny Mary Poppins once said, “A spoon full of sugar, makes the medicine go down.” And it turns out that there’s plenty of sugar in Disney’s ESPN pantry. The rest of the DIS media conglomerate is firing on all cylinders and there’s still plenty of growth in the tank for Walt Disney stock. ESPN is an issue, but one that many DIS stock investors are placing too much emphasis on.
For those investors with longer timelines, the malaise caused by ESPN could be the opportunity they are looking for to snag Disney stock for years’ worth of growth and income potential.
Walt Disney Stock’s Big ESPN Problem
There was a time when ESPN was the only sports venue out there. If you wanted to watch or hear about the biggest names or games, you pretty much were forced to watch the channel. That turned ESPN into a cash cow for DIS stock. However, today, that simply isn’t the case. There’s a million blogs, networks and other ways for viewers to get their sports fix. And some of these are starting to rival ESPN for viewership.
Not helping Walt Disney stock is the general trend of cord cutting by consumers. People continue to cancel cable subscriptions in favor of online streaming services. That trend is only accelerating as streaming services like Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) are now offering original programming to compete with traditional cable networks.
The combination of sports junkies going elsewhere and people leaving cable altogether has removed about 11 million ESPN subscribers off of Disney’s manifest.
The ESPN problem for DIS seems large when you start putting dollars to that subscriber loss. Disney’s media and network’s segment is its largest business and ESPN is its largest contributor to that $24 billion in revenue. The reason is that sports networks cost subscribers the most and ESPN is the king of the hill. According to SNL Kagan, DIS stock gets $7.21 per ESPN subscriber and about a $1 per ESPN2 subscriber every month. That contrasts to only 71 cents, we pay for CNN every month.
So any loss of viewers and subscribers is a major hit to Disney’s earnings. And we already saw that start to take effect. The latest results from DIS saw network and media’s revenues fall 3% and operating income dip by roughly 8%. During the conference call, Disney basically spelled out that “lower advertising and affiliate revenue and higher programming and production costs” at ESPN was the reason for the declines. Gulp.
Why ESPN May Be Big for DIS Stock in a Positive Way
ESPN is a cause for concern, but investors may be getting ahead of themselves when fleeing the House of Mouse. For one thing, the management at Disney seems to working on solutions to turn the tide.
Directly, DIS has turned to new streaming partnerships to counteract the loss of subscribers at ESPN. Getting ESPN on Sling TV or on PlayStation Vue helps regain customers lost to cord cutting. While it won’t net Disney stock all the lucrative affiliate fees, it’ll stop the bleeding. And let’s not forget that DIS owns a 30% stake in streaming service Hulu, which could easily start offering the channel. According to Disney CEO Bob Iger, these channels “are going to offer ESPN opportunities that they haven’t had before to reach more people.”
And as for streaming sports in general, DIS’s new 33% stake in BAMTech will bear fruit over the longer-term. The $1 billion buy is actually pretty shrewd. The unknown firm already powers the streaming services for HBO Now, the NHL, Major League Baseball and World Wrestling Entertainment, Inc. (NYSE:WWE).
But the real win is that Disney has the option to buy it out completely. That will bring its tech 100% under the House of Mouse’s roof and make it so easy for it to launch streaming channels for ESPN, ABC, Disney Junior and the Disney Channel. The back catalog of 90’s Disney Channel hits is Millennial gold, that actually could be a bigger than ESPN. If there is one thing I know about my generation, it is that most of us are willing to pay a big premium for nostalgia.
And the real thing in all of this, DIS still has plenty of time to figure out a solution. That’s because it’s other businesses — studio entertainment, parks and resorts and consumer products — are growing like weeds. The company continues to see huge success from its Marvel and Star Wars movie franchises, while its new Chinese theme park operations are about to break even after opening just a short time ago. Overall profits at Disney are up, cash flows are growing and it continues to see rising revenues.
In the end, that gives DIS stock plenty of time to overcome its ESPN issue.
Skip the ESPN Drama and Buy DIS Stock
The truth is, Walt Disney stock is a well-diversified machine. And yes, ESPN is a major piece of that pie, but it’s not the only one. However, based on how the market reacts to the latest ESPN subscriber numbers, you’d think that it was. Which leads to opportunities for investors.
The 5% drop in DIS stock now has it trading for a price-to-earnings ratio of 17 and dividend yield of 1.42%. Not too pricey, but a real value in the current market. Especially when you considered that Walt Disney stock has plenty of levers to pull with regards to ESPN and its other real money making operations.
For long-term investors, the ESPN drama has given them a gift to snag-up the House of Mouse for a song. They should take the opportunity.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.