Ahead of the Tape: News Isn't All Bad at Disney's ESPN -- WSJ
May 09 2017 - 03:03AM
Dow Jones News
By Steven Russolillo
For Walt Disney Co., the bad news at ESPN might turn less so
sooner than investors think.
The troubles at the media and entertainment giant's cable
property are well-documented: rising costs, declining viewership
and the overall cord-cutting trend are at the heart of the problem.
About 762,000 subscribers dropped their cable- or satellite-TV
service in the first quarter, the industry's worst-ever subscriber
losses to start a year and five times higher than the year-earlier
period, according to MoffettNathanson.
Those trends directly impact ESPN, which laid off about 100
employees a few weeks ago. That weighs on investors, with Disney's
volatile share price still roughly 8% below its all-time high hit
in August 2015. Six double-digit percentage swings since, Disney's
stock doesn't command the premium valuation relative to the overall
market that is customary, which provides investors an opportunity
ahead of Tuesday's earnings report.
The numbers reflecting ESPN probably won't be great, but there
is hope that they could soon stabilize. Analysts polled by FactSet
forecast fiscal second-quarter earnings of $1.41 a share, up 3.7%
from a year earlier. Revenue for the period ended in March is
expected to have risen 3.4% to $13.4 billion.
ESPN matters so much to investors because it is the most
important part of Disney's "media networks" business, which
comprises roughly half of the company's operating income and is
bigger than its studio and theme-park units.
As traditional cable struggles, Disney has signed onto several
low-priced "slim" internet-TV bundles and is working on its own
"over-the-top" digital product that is expected to launch later
this year. Those deals should help stabilize ESPN's performance.
Chief Executive Robert Iger noted late last year that he was
"bullish" on ESPN and that it would return to more robust growth.
Analysts are even more optimistic.
Operating income in the media-networks segment has declined on a
year-over-year basis in four of the past five quarters. It is
expected to have fallen again by 4.2% in the recently completed
quarter. But analysts forecast a return to growth as soon as this
summer. That is earlier than had been expected. As of the end of
last year, they had estimated this segment would continue reporting
declines through the middle of next year, according to FactSet
data.
In a research note published late last month, Morgan Stanley
analyst Benjamin Swinburne made the case that ESPN was transforming
"from drag to driver." He said ESPN's distribution revenue-growth
rate could nearly double over the next four years. That is because
roughly one-fourth of ESPN's carriage contracts with cable- and
satellite-TV providers are up for renewal over the next 18
months.
Mr. Swinburne is optimistic that ESPN will be able to boost
prices it charges pay-TV distributors "above consensus cautious
expectations" and that it will benefit in the future from new
streaming deals.
As ESPN goes, so goes Disney's stock, a truism in play now more
than ever.
Write to Steven Russolillo at steven.russolillo@wsj.com
(END) Dow Jones Newswires
May 09, 2017 02:48 ET (06:48 GMT)
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