Disney Needs ESPN In The Game -- Ahead Of The Tape

   (FROM THE WALL STREET JOURNAL 2/9/16) 
   By Steven Russolillo 

The force may be with Walt Disney Co., but the media conglomerate needs more than that.

The cord-cutting phenomenon and its worrisome impact on ESPN have overshadowed success from Disney's "Star Wars" bonanza. Shares have been on a roller coaster since last summer and are now about a quarter off their peak.

When Disney reports fiscal first-quarter results Tuesday, the stock's next move likely will be dictated by what it says about the sports network.

Analysts polled by FactSet expect earnings for the quarter through December of $1.45 a share, up 14% from a year ago. Revenue is forecast to have risen 10%. While Disney rarely misses estimates, the bigger issue is cable. Concerns are justified.

ESPN is the most important part of Disney's "media networks" business, which accounts for 52% of operating income in fiscal 2015. While that is by far Disney's largest unit, its contribution has been falling for four consecutive years. Analysts expect worse to come.

In November, Disney said it lost three million ESPN subscribers within a year. That followed an earlier warning in August. As ESPN sheds subscribers, Disney earns less from pay-TV operators that carry the content.

The unparalleled lure of live sports programming gives Disney strong bargaining power. But contractual obligations make a pure ESPN online offering problematic. At the same time, rising cable costs have prompted more consumers to either cut the cord entirely or move to "skinny" bundles of channels that sometimes exclude ESPN.

J.P. Morgan forecasts operating income from cable networks will decelerate, pushing the broader media segment below half of total operating income by 2017. As recently as 2011, it was 69%.

Yet, even after Disney's recent swoon, the stock still trades at 15.6 times projected earnings over the next 12 months -- right around its 10-year average. That isn't enough of a bargain.

This is the investing equivalent of "fourth and manageable." The smarter move here is to punt rather than go for it.

(END) Dow Jones Newswires

February 09, 2016 02:47 ET (07:47 GMT)

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