It’s been a lost period for Walt Disney Co (NYSE:DIS) stock. The Disney stock price has been flat for over three years now, with DIS stock staying in a relatively tight range.
The biggest reason Disney stock has struggled is concerns about its ESPN unit. The company’s Media Networks segment, which includes the network ABC and other properties, still drives nearly half of operating income. As subscriber growth has turned negative, those profit streams seem at risk. Indeed, in fiscal 2017, Media Networks profit dropped 11%, including a 10% drop in the Cable Networks category.
First-quarter numbers were better on the cable side, with profit falling just 1%, but ESPN saw a 3% decline in subscribers and an 11% drop in ad revenue.
Even with the Disney stock price at a reasonable 14x forward EPS, it’s tough to see upside if the TV businesses continue to decline. With a new head at ESPN, and a standalone streaming service on the way, Disney hopes to stem the bleeding. But I’m not nearly confident enough in those hopes to turn bullish on DIS stock.
The Plan for ESPN
James Pitaro, who previously ran the company’s consumer products and interactive business, was named the new president of ESPN on Monday. The position came open in December, when longtime boss John Skipper surprisingly resigned.
Pitaro will have a full plate. Disney spent $1.6 billion in August to take a controlling stake in streaming company BAMTech, and will be looking to integrate that acquisition. The ESPN+ standalone streaming service will launch soon. And affiliate fee agreements with cable operators like Comcast Corporation (NASDAQ:CMCSA) and Charter Communications, Inc. (NASDAQ:CHTR) need to be renewed.
It’s worth pointing out that the consumer business didn’t exactly post torrid growth under Pitaro. According to 10-K filings, segment revenue declined 3% in fiscal 2016 and 13% last year. Operating profit declined 7.5% over the two years. There were some one-time effects, but performance at ESPN will need to be much, much better.
And, again, it’s going to be difficult. ESPN+ is an intriguing product, and a way to deal with cord-cutter defections. But ESPN’s problems aren’t just confined to sports fans. The underlying problem here is that ESPN was able to get $8-9 per month, per industry estimates, for every single cable subscriber — whether they watched sports or not. Those affiliate fee revenues were the backbone of the impressive growth and huge margins in the unit.
Those revenues aren’t coming back. Cord-cutters who aren’t interested in sports aren’t going to subscribe to ESPN+. To keep revenue and profits even stable, then, ESPN has to better monetize sports fans.
That’s going to be tough for Pitaro to pull off. ESPN+ is only going to be priced at $4.99 a month. ESPN should get more advertising revenue per viewer on streaming. It will have more air time, and conceivably more content. But it seems unlikely that benefit will be enough to offset the coming drop in affiliate fees.
Disney Stock Is Cheap – For Good Reason
There are perhaps some avenues through which Disney can eke out some growth. On the ESPN side, the company already has cut costs — and could continue to do so. It’s even possible ESPN could let its pricey NFL rights go, whether to a broadcaster like CBS Corporation (NYSE:CBS) or a tech company like Amazon.com, Inc. (NASDAQ:AMZN) or even Facebook Inc (NASDAQ:FB).
Beyond that, the parks business is solid. In content, coming broader streaming offerings could challenge Netflix, Inc. (NASDAQ:NFLX), as Luke Lango argued this week.
But execution needs to be close to perfect if the 47% of income from the Media Networks segment continues to decline. And I think that’s too narrow a bull case to get excited about Disney stock.
As of this writing, Vince Martin has no positions in any securities mentioned.
