Disney: Jaw Dropping Bullishness Despite Escalating ESPN Problems

| About: The Walt (DIS)


The market continues fighting a negative trend at Disney.

The sub losses at ESPN set up a huge squeeze on profits.

The stock doesn't warrant a premium valuation in comparison to other media giants in the middle of potential buyouts.

Despite another month of jaw dropping subscriber losses at ESPN, Barron's listed Disney (NYSE:DIS) as a value play. The stock is only down roughly $20 from the peak levels, yet investors keep piling into the stock of the media giant.

While the market appears to acknowledge the subscriber issue, most people want to overlook the impending profit hit. At just above $100, do investors really want to follow the advice of Barron's?

Escalating Sub Losses

After a public spat last month surrounding the escalation of sub losses at the ESPN cable network, Nielsen not only stood behind the weak November sub numbers, but also confirmed further weakness in December. The flagship ESPN network lost another 555K subs bringing the two-month losses to 1.2 million.

Source: Sports TV Ratings

The biggest beef from the point of Disney was that Nielsen wasn't accurately capturing the OTT subs. The above numbers suggest that the data is accurately reflecting the shift as ESPN2 and ESPNU lost even greater numbers. In fact, ESPNU only trailed the MLB Network for the most sub losses during the month at a whopping 710K.

These numbers suggest that consumers are in fact cutting the secondary networks at even faster clip. Whether this is due to cord cutting or OTT services like the recently announced DirecTV Now where the prime bundle includes only ESPN in the 60 channel package for $35.

What matters most to Disney is the main ESPN network that grabs $7 in fees per sub. Though one has to wonder if the OTT deal with AT&T (NYSE:T) garners the same fees considering the low price to consumers. In essence, the normal ESPN cost would equate to 20% of the total cost of the OTT package.

Premium Valuation

What really stands out with Disney is the willingness of the market to assign a premium valuation in the face of these troubles. As highlighted in my last article, ESPN faces escalating content costs at the same time that subs are declining.

As Outkick highlights, the average cost of the NBA deal to cable customers is $30 whether one likes professional basketball or not. This is exactly why subs are abandoning ship because most people aren't die hard sports fans willing to pay that much money for sports they don't even watch.

The end result is that Disney missed EPS estimates last quarter and the second time this year. Comparative media companies like Time Warner (NYSE:TWX) and Viacom (NYSE:VIA)(NASDAQ:VIAB) actually beat analyst estimates and both are potentially in the process of buyouts. At a market value of $160 billion, Disney isn't likely to get a premium deal questioning why the stock trades similar to Time Warner and at a rich valuation for a company missing estimates.

DIS PE Ratio (Forward) Chart

DIS PE Ratio (Forward) data by YCharts


The key investor takeaway is that Disney doesn't warrant a premium valuation based on a historical positive view of the brand while the key profit generator is in turmoil. One has to question why the market is paying up for a company missing analyst estimates that are trending down.

Disclosure: I am/we are long TWX, VIAB.

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: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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