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In our previous research on Walt Disney (DIS), we discussed the issues regarding the retransmission fees paid by Dish Network (DISH) to Disney in order to carry the ESPN channel. We also focused on certain areas such as the consequences and losses that Disney would incur if Dish decided to drop ESPN.

The contract between the two to carry ESPN was set to expire on September 30, 2013. After a long discussion, both the companies have now reached a short-term agreement for a few reasons.

Contract continuation stumbled

Both Disney and Dish, reached a short-term agreement in order to carry ESPN and other Disney channels. The contract between Disney and Dish has two points of contention. First, the AutoHop technology is a feature included in Dish's Hopper set-top boxes that allows subscribers to skip commercials in a single push of a remote control button. The feature can record four networks prime time programming without any TV commercials. Dish is caught up in a lawsuit with ABC, CBS Corp, Comcast's NBC, and 21st Century Fox over the feature. These broadcasters have stated that the hopper violates their copyrights.

Second, the contract extension affect channels owned by Disney in markets such as New York, Los Angeles, and Chicago, and it is trying to build distribution for two new channels, Fusion and the SEC Network. A Hispanic-oriented Fusion channel is a venture with Univision Communications that provides a multi-platform network for Disney's ABC News and Univision, which is planned to launch by the end this year.

Whereas, the SEC Network is the Southeastern Conference College sports network, which Disney plans to launch in the second half of 2014. Hence, it is negotiating the terms for both channels. This will help Disney to expand its content offerings and earn huge profits through broadcasting fees.

For the time being, the short-term agreement between Disney and Dish prevented blackout of channels such as ESPN, the Disney Channel, and some ABC stations for Dish's subscribers in the U.S. Dish has around 14 million pay-TV subscribers, which is much more than the 3 million Time Warner Cable (TWC) subscribers who lost CBS Corp (CBS) programming for a month before the two companies agreed to renew their contract on Sep 2, 2013. The short-term contract between the two is worth millions of dollar and covers fees paid by Dish to carry Disney's channels.

For now, we assume that Disney will continue to generate revenue over the next few months or even years. If the two companies decide to extend the contract for next five years like Comcast and CBS, then Disney will generate higher revenue from its sports channel over the next few years.

Growing Consumer Products business

Disney Store and Disney Shop comprise Disney's consumer products business, and it has space for its shop ranging from 800 to 1,100 square feet in J.C. Penney's (JCP) 565 stores across the U.S. Disney's consumer products will be also offered on J.C. Penney's online shopping website. The shop includes Disney's toys, dolls, collectibles, and children's apparel specially designed for J.C. Penney. In addition, Disney can sell its merchandise, which is offered at its theme parks at a discounted price. The small character figures that are regularly priced at $12 are offered as two for $10, and the $8 Mickey and Minnie plush characters are two for $7.

Disney's merchandise has always been a huge seller as children are a huge driver for sales. In addition, the upcoming holiday season can bring meaningful growth in sales of Disney's consumer products leading to high revenue generation. Over the past few years, Disney has been reporting growth ranging from 14% to 7%. With the occupied space in J.C. Penney and Disney's merchandise being an excellent seller, we assume that Disney's consumer products business will achieve growth of at least 10% (assuming the average of the growth generated over the past years), generating revenue of $852 million in the fourth quarter.

We are bullish on JCP. Please also read: J.C. Penney: No, It's Not Dead Money

Conclusion

The new short-term contract will help Disney generate revenue from its ESPN sports channel over the next few months. No pay-TV service provider can be a meaningful player without carrying ESPN, one of the best sports channels with the highest profile. Also, the stock price of Disney can observe an upward trend if the plan to extend the contract for over next few years comes together. Under the agreement with NRTC, Disney can expand its content and offering only if it is successful in building distribution channels through Dish. Currently, on the valuation side, Walt Disney's stock has appreciated 37% YTD. The stock's trailing PE is 20.11 and has a forward PE of 16.88, which shows an upward trend in the company's earnings with an ROE of 14.74% and expects EPS of $3.92 for next year. The above fundamentals and valuation make the stock relatively attractive for investors.

Source: Walt Disney: Still Standing Strong

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.