Should Walt Disney Co (DIS) Worry Over ESPN?

A few quarters before, Walt Disney Co (NYSE:DIS) indicated that its sports channel, ESPN, was losing subscribers setting off worries. One of the reasons cited was the cord cutting, which was steadily growing though subsequent numbers from the cable firms provided some reliefs to the businesses engaged in the cable. Now, Count Atlantic Equities joining the chorus of the brokerages to voice its concern on the growth of the subscribers. However, investors were not unduly worried about it until now. Can they remain so in the upcoming period or in the long-term?

Profit To Remain Flat

Count Atlantic Equities analyst, Hamilton Faber, said that Walt Disney Co (NYSE:DIS) can continue to gain from its strong pricing in the sports channel. However, its profit from ESPN would remain relatively flat for the next five-year period. The biggest concern expressed by the analyst was that the absence of a convincing DTC model, as well as, that the falling subscribers would lead the contraction of profit in the same period. However, there are others who believe that subscribers would like to enjoy sports live as viewing them at the convenient time would not be enticing or lacking the same thrill. Therefore, subscribers might return to the fold if there is going to be interesting sports events.

The analyst also felt that the near-term pricing growth would undoubtedly help the entertainment firm to profit, which would continue to be flat in the next five-year period. After that period, the average growth would come down to -12%. In such a situation, the analyst sees the sports channel being pushed into the red. The brokerage wanted the company to establish a convincing direct to consumer model to offset the weakness. The analyst said that Walt Disney Co (NYSE:DIS)’s ESPN would have five years to focus on that to make it a successful model.

Penetration Level To Fall

Count Atlantic Equities said that the underlying subscriber projection for the sports channel was modified to assume a contraction of 2% a year in the pay TV market in the United States from 1.5% estimated earlier. The analyst also sees ESPN continuing to shed penetration to 85% in 2019 from 92% in the last year. As a result, the brokerage slashed its EPS estimation for the year 2017 to $6.22 from $6.40 though it reduced modestly to $5.64 from $5.66 for the current year.

Walt Disney Co (NYSE:DIS)’s stock was considered as a blue chip and haven for investors. However, the recent reports on ESPN subscribers have dragged down its prices nearly 20% in the last six-month period. Faber believes that the stock does not merit the blue chip tag in view of number sector structural issues. The brokerage has downgraded the stock to a rating of Neutral and slashed the price objective to $104 from $148. However, JPMorgan analysts believe that the subscriber issue was an ‘exaggerated’ one. The brokerage said that growth from other areas would address the weakness seen in subscribers.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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