There is a lot of happy talk about Walt Disney Co (NYSE:DIS) as the stock opened for trading on Mar. 27. Disney’s Beauty and the Beast, a live-action remake of the 1991 animated film, has made $317 million in the U.S. since opening two weekends ago. International markets should double that take for DIS stock. By taking a profit share instead of straight salary, star Emma Watson has made herself the highest-paid actress in Hollywood.
The studio hasn’t looked so good since Star Wars: The Force Awakens opened late in 2015.
But if you’re thinking of buying Disney stock based on this performance, you might want to think again. DIS shares have already advanced 23% since mid-October, and now command a price-to-earnings ratio over 20. The 78 cents per share dividend yields a paltry 1.39%.
In fact, if you do want to buy Disney stock, I might be inclined to sell you my shares.
Disney Stock Is Just OK
I began accumulating DIS stock in the summer of 2014, and I’m sitting on a 15% gain. The problem is that it is just a little better than the gain in the S&P 500 over that time. I might have been better off with an index fund.
The problem can be found in Disney’s first quarter report, delivered in February. Studio entertainment for that quarter brought in $2.5 billion. This was down from the previous year, but more importantly, it represented just 17% of the company’s total revenue.
Media networks, especially ESPN, continue to be the biggest factor in its earnings, representing 42% of total revenue. Those figures were down from a year earlier. DIS stock bears might also want to focus in on the “consumer products” category, which while the smallest piece of the business still had a steep fall-off in sales from the previous year — over $400 million — because Disney is not a factor in video gaming.
Bigger Problems With DIS Stock
Of all Disney stock’s problems, ESPN remains the biggest one. Consumers have been abandoning ESPN in droves, as cable companies start offering “skinny bundles” to reduce cord-cutting.
ESPN has responded by cutting head count, by focusing its news coverage on core audiences and core sports and by offering to sell its services outside the cable bundle for $20 per month. You can also expect the company to play hardball with sports leagues when rights deals come due over the next few years.
But there is a risk that the leagues could do what they do in Europe, going directly to infrastructure owners like Comcast Corporation (NASDAQ:CMCSA) or AT&T Inc. (NYSE:T), cutting ESPN out entirely. Twenty-First Century Fox Inc. (NASDAQ:FOX) is also pressing it on the ratings front with its sports channels.
ESPN was originally an add-on to a bigger trade, the 1985 acquisition of ABC. Privately-held Hearst Communications still owns 20% of it. This could complicate Disney’s ability to sell the unit.
But something needs to give for DIS stock to start rising again. Investors are pleased that CEO Bob Iger has agreed to stay on past his retirement date, but he still has no obvious heir and, from a corporate perspective, he still has some very obvious problems.
As a Disney stock holder, I’m more concerned with the video game problem than even the video problem. Disney’s product mix should make it a natural for video gaming, but its technology in this area is backward, and it would take substantial investment to get it on-track. Meanwhile, the franchise is dying off even faster than ESPN.
There is no magic wand that is going to fix any of this, no matter how well its movies do. Someone needs to make some hard decisions outside the movie business or DIS stock will continue to languish.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in DIS.
