With attention focused on the potential vulnerability of ESPN to cord-cutting, shares of Disney, long an investor favorite among media stocks, have fallen faster than the Standard & Poor’s average over the past two months.
But Michael Nathanson, of MoffettNathanson Research, says in a report Friday that Disney remains a buy. While he expects its earnings growth to slow, he expects Disney to continue trading at a premium.
And while some concerns about ESPN are justified, he says some of the loudest talk about the sports giant are just “hyperbolic drivel.”
For perspective, Nathanson notes that between Oct. 2013 and the end of 2015, Disney’s stock value rose by $60 billion. That contrasts to Netflix, which is up $30 billion, and all other programming stocks, which are down $80 billion.
One reason for that growth is that while other media companies were buying back stock, Disney was buying franchises like Marvel and Star Wars and building video product like WatchESPN. That buoyed Disney even as TV ratings fell and ad growth slowed.
But since Nov. 25, Disney stock is down 21% versus 11% for the S&P.
Some of that, according to Nathanson, was selling on the release of Disney's the new Star Wars film, which follow the old Wall Street saying buy on expectation, sell on news.
But the big issue at Disney is "legitimate concerns over long-term affiliate fee growth and rising sports costs at ESPN."
Nathanson says that in particular, there are two near-term issues that need to be addressed: a slowdown in affiliate fee growth to 2% in 2015 and an increase in NBA costs to 2017 as a recently signed deal takes effect.
“Despite our belief that ESPN will keep its market leading position into the next decade with its long-term sports rights locked up, the combination of slowing affiliate fee growth and rising cost inflation will restrain operating income growth over the next two years,” he says.
But Nathanson says that the discussion about how ESPN would fare in an over-the-top world is a “manufactured debate.” To Nathanson, there’s no question that there is no economic motivation for an ESPN a la carte service, and he doesn’t expect Disney management to move in that direction.
Nevertheless, he says “Disney management needs to proactively change the ESPN narrative to show that, while FY 2015 slows, longer-term concerns are unfounded.”
Nathanson see 2016 as “another solid year” for Disney but he expects earnings growth to decelerate from double digits the past two year to about 7%.
As for the TV business, he sees revenue at broadcasting up 1.7% in 2016 and revenue from cable rising 1.5%, giving Disney’s Media Networks division a 1.5% increase in revenues. That will translate into a 1.1% increase in Media Networks earnings, with cable up 1.7% and broadcasting down 3.2%.
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