Disney/Dish: The Next Time Warner/CBS?

| About: The Walt (DIS)

Walt Disney (NYSE:DIS), the largest operator of theme parks and resorts and owner of ESPN, reported total revenue of $11.58 billion up 4% from the previous year in its third-quarter results. It generates maximum revenue from both its media network segment and parks and resorts segment. Walt Disney's strategies mainly focus on generating the best creative content possible along with innovation and utilizing the latest technology.

May be and may be not situation

After the battle between Time Warner Cable (TWC) and CBS, Walt Disney's most expensive pay-TV channel, ESPN, and the U.S.' second-largest satellite-TV provider Dish Network (NASDAQ:DISH) are facing intense pressure, as their eight-year agreement will expire on September 30, 2013. The companies are negotiating an agreement renewal. The major sticking point is broadcast fees, similar to the Time Warner and CBS issue. The negotiations will include the amount that Dish is liable to pay Walt Disney as retransmission fees. Subscribers worry that they might lose access to Disney's content. (See: Time Warner Cable: Doing It The Microsoft/Comcast Way)

Walt Disney's ESPN channels have the highest profile and can help the pay-TV providers like Dish retain their customer base in the U.S. It will be quite tough for Dish if it drops ESPN. This would affect Dish's 14 million subscribers, and they are likely to shift to other pay-TV providers, especially since football season has just begun.

Currently, Dish pays around $5.54 a month per subscriber for ESPN, but the fees could raise to around $7 a month. ESPN contributes nearly $930 million a year to Disney. If the duo separates, ESPN may face a loss of nearly $930 million. But, even if the two companies separate, ESPN can compensate this loss since it has back-up agreements with the top seven service providers.

In the case of Time Warner and CBS, the duo came up with a new deal where Time Warner Cable agreed to pay CBS around $2 a month per subscriber over the next five years, which is more than double of the previous deal. CBS forecasts to generate $1 billion from retransmission fees by 2017. This figure can go up if the company continues to create high quality content with innovation, which should receive fair compensation.

Parks and resorts to bring growth

In the third quarter of this year, Disney's major parks and resorts segment revenue reached $3.68 billion, up by 7% year over year. The parks and resorts segment contributes around 31% of the company's revenue. An increase in the number of foreign visitors at Walt Disney World Resort and Disneyland Resort, increase in average guest spending, occupancy for rooms, and increased ticket prices all drove the segment's growth. In June, it raised its one-day adult ticket price by $5 to $92 and kids tickets by $5 to $87. The increased ticket prices did not affect the third quarter. We expect that the company will continue to make a profit through raised ticket prices in the coming quarters. The company earns maximum profit through tickets, food, beverages and room occupancies. We expect Disney to make more profit in the fourth quarter as special events such as Halloween and Christmas are expected to attract more visitors. Additionally, its expansion of the theme park's Fantasy-land section Magic Kingdom is nearly complete and it is expected to open later this month.

If we consider the revenue growth rate of 7% to be constant, then this segment's revenue for the fourth quarter will be $3.93 billion. As Disney is the ultimate destination for a family vacation, we expect the number of visitors to increase and Disney to continue to make a profit in the future.

Summing up

On the valuation side, Walt Disney's stock has appreciated around 30% YTD. The stock's trailing PE is 19.38 and it has a forward PE of 16.31, which shows an upward trend in the company's earnings with an expected EPS of $3.92 for next year.

Disney's parks and resorts segment has strong growth factors that will continue to bring potential growth. If Dish agrees to pay the amount demanded by Disney, the contract will be renewed, and Disney will continue to serve Dish customers and generate profit from the ESPN channel. However, if either of the companies step back, the stock prices are likely to take a hit. But, from a long-term perspective Disney is still a strong buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.