Disney: Tumbling ESPN Subscribers Not A Worry For Me

| About: The Walt (DIS)


Amidst so much worry, fear and other general hoopla made about ESPN subs and Disney's future, I take a look back into the past.

I've compiled statistics for the Media Networks segment from 2004-2015 - all information is included within.

And, you know what? This information doesn't scare me. I still feel very comfortable holding DIS as a core position, and I hope to continue building my position on weakness.

If you follow my writing here, there's no doubt that I consider Disney (NYSE:DIS) to be an absolutely wonderful company and a great long-term investment. Disney sits at the top of my portfolio as far as weighting goes, and I feel entirely comfortable with that decision. To me, DIS is a sleep-well-at-night (SWAN) stock, and I've made a habit of adding to my position on dips and regularly via selective dividend reinvestment.

However, many investors don't hold this company in the same high regard. Lately, fears have risen pertaining to the company's Media segment, and more specifically lost ESPN subscribers within the Cable Networks division, as the cable cord-cutting trend picks up speed. These fears have beaten down the stock. Right now, it's trading more than 21% off its 52-week high. Everywhere I go to read an article of Disney, the commentary seems to be the same: cord cutting this, spin-off ESPN that, overvalued, growth will slow, blah, blah, blah.

Well, what I wanted to do was take a look at the numbers and see just how worried investors should be about ESPN and cord cutting. Obviously, the past means very little in terms of future performance. However, I think looking at actual financial figures, rather than speculating about how the cable industry as we know it will evolve, is likely a more productive exercise for Disney's shareholders.

So, here's what I've done. Looking back at annual earnings reports from 2004 to present, I've compiled data I believe to be relevant to this cord-cutting/ESPN discussion. You will see annual subscriber totals for each of the networks in the ESPN family. You will see DIS's overall revenue, its Media segment revenue, the percentage of total revenue that this Media segment makes up, and the revenue breakdown within the Media segment, between the Broadcasting and Cable Network divisions. You also will see how EPS has fared throughout this timeline, which is an important comparative trend to track when looking at the bigger picture. I will post my spreadsheet data as well as the relevant graphs, and then, at the end I'll give my opinion on the matter (which, I admit, in the grand scheme of things, is worth very little).

So, we'll begin with ESPN subscriber counts. I've overlaid the annual EPS figure on this graph as well. It's important to note that looking back, I wasn't able to collect a complete data set. In 2007 and 2008, the annual reports weren't clear on subscriber numbers; they instead focused on specific events and offerings and their growth, rather than the bigger picture. The layout of Disney's annual reports changed drastically in 2009, morphing from a somewhat overwhelming presentation full of vibrant images with text built in, almost as an afterthought, to a bland, text/figure-based layout where information was more readily available and organized. Reading these older reports reminds me more of comic books than earnings presentations - though, I admit, it was a pleasant change from the work I usually do when looking back at companies. I was able to experience nice bits of nostalgia browsing the collages of characters from the biggest films, TV shows and sporting events of the given year. However, it made data collection more difficult, and although some of the magic is gone from the newer reports, their structure certainly made the second half of this data collection easier. I say all of this because you will notice gaps in the graphs below and I wanted to give an explanation.

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
ESPN 89 90 92 n/a n/a 99 100 99 98 99 95 92
ESPN2 88 90 91 n/a n/a 99 100 99 98 99 95 92
ESPNEWS 42 46 51 62 n/a 70 74 73 74 76 73 70
ESPN Classic 55 58 62 n/a n/a 64 41 33 31 31 27 25
ESPNU n/a 8 10 20 n/a 55 74 72 73 76 74 72
SEC Network n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 63 62

As you can see, in recent years, there is a downtrend in subscribers... this isn't news to investors at this point in time. At the end of Disney's 2015 fiscal year, ESPN and ESPN2 subs had fallen back to 2006 levels, which would seem to be an issue. We always want to see growth, right? Well, it would seem to be a major issue until you look at the revenue picture, and you realize that in 2015 DIS's Media segment sales were nearly double of 2006's figure, with the Cable Networks division more than doubling the decade-old totals. So, yes, subs are falling, but revenue isn't. ESPN's brand is strong, and it is able to demand a premium for ad spots.

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Revenue 30,752 31,374 33,747 35,510 37,843 36,149 38,063 40,893 42,278 45,041 48,813 52,465
Media Networks 11,778 13,207 14,186 14,913 15,857 16,209 17,162 18,714 19,436 20,356 21,152 23,264
% Of Overall Rev. 38.29% 42.09% 42.04% 42% 41.90% 44.84% 45.09% 45.76% 45.97% 45.19% 43.33% 44.34%
Broadcasting 5,368 5,945 6,027 5,746 5,816 5,654 5,687 5,837 5,815 5,903 6,042 6,683
Cable Networks 6,410 7,262 8,159 9,167 10,041 10,555 11,475 12,877 13,621 14,453 15,110 16,581
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
EPS (Diluted) 1.12 1.24 1.64 2.25 2.28 1.76 2.03 2.52 3.13 3.38 4.26 4.9

Media Networks revenue has fallen a bit from its peak in terms of the overall percentage of DIS revenues in 2013, though this movement isn't overly significant and has remained steady in the mid-40s since 2009.

All in all, I think critics and analysts are making ESPN subs into a much bigger issue than it appears to be for the company. Over the years, Disney has grown into a massive entertainment and media giant with a diversified network of revenue streams that have wonderful synergies with one another. Current CEO Bob Iger has added so much value to this company throughout his tenure, which isn't over yet. I think DIS will continue to grow organically with its wonderful stable of characters and stories to work with. I also expect the company to make deals, bolstering its content library moving forward. I like what DIS has done regarding the recent pushes to move content online via the WatchESPN app and other streaming services. I expect this trend to continue. I also wouldn't be surprised to see a Disney packaged skinny bundle at some point in time if and when the current cable situation does indeed have a breakdown. If/when this happens, I'm certain that DIS will demand a premium for its product, and I know of at least one patron who will happily pay whatever the ESPN costs are (hint: it's me)...this article was fueled by the SVP late night version of SportsCenter.

I hope you all find these figures interesting. Disney's shareholders are used to being thrashed these days by those who think the current media system is doomed. I sleep well holding my shares in part because of the performance shown in these graphs, and I hope that it helps you too as well. I wouldn't be surprised to see ESPN subs scrutinized in the upcoming earnings report, and if my assumption proves correct and the stock experiences more weakness because of this negative sentiment, I will happily add to my position. Last year, I named Disney as my favorite long-term pick, and that statement still holds true. Content is king in media, and I believe that Disney is the king of content. Best wishes to all!

All data used in charts can be found here on Disney's investor relations site.

Disclosure: I am/we are long DIS.

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.

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