The Walt Disney Company (NYSE:DIS) provides an excellent value opportunity given the company has been out of favor due to ESPN. Given the shift in the media industry from traditional TV to online streaming, Disney has been struggling to deliver content to new generation viewers. Therefore, they have been experiencing a decrease in viewers, which has led to a decline in advertising revenues as they relate to ESPN.
Decreasing revenues and increasing costs, associated with television rights for major sports leagues, have decreased operating income. With recent developments, Disney has announced their new strategy to provide a direct-to-consumer ESPN service through their mobile and online apps, which will give consumers direct and easy access to additional customizable ESPN content.
Despite the struggles Disney faces with ESPN, it is important to consider that the company has been performing well. Company revenues, as a whole, have been growing. With excess amounts of cash, they have been paying out dividends and buying back stock. In Q3 FY17, operating income was trending up YoY in Parks & Resorts and Consumer Products & Interactive Media 18% and 12%, respectively.
Studio Entertainment was trending down compared to Q3 FY16, but the decline was because there were a few highly anticipated movies released in FY16 and no big name movies were released in FY17. We can expect to see an upward trend in this segment in FY18 driven by the releases of films such as Avengers: Infinity War, Thor: Ragnarok, Star Wars: The Last Jedi, Incredibles 2, etc. EPS was down 2% YoY to $1.58.
The new ESPN distribution strategy, coupled with the leverage of Disney’s Studio Entertainment content and growth in the Parks & Resorts and Consumer Products & Interactive segments, will help Disney drive their revenue growth for years to come.
With a recently large investment in BAMTech, a platform for streaming services, Disney will be able to expand its capabilities and develop a new direct-to-consumer ESPN streaming service. This will allow subscribers to access the service through upgraded and easily customizable ESPN applications. It will also allow viewers to choose which games they want to watch instead of having to buy the entire season for a particular sport. This new service will be made available in early 2018.
ESPN has been a leading broadcaster for sports, including Football, NFL, MLB and NBA, but changes in technology and the media industry have limited ESPN's growth. As consumers become more tech-savvy, they are looking for ways to reduce their costs of TV entertainment. Thus, they look to the internet in search of services similar to Netflix (NASDAQ:NFLX) and Hulu for convenience and cost savings.
In addition to the ESPN service, Disney will be launching its own direct-to-consumer Disney-based streaming service where it will allow subscribers to view original Walt Disney Productions, Marvel, and Lucasfilm features. This new streaming service will be made available sometime in 2019, and it will open up a new market for Disney to capitalize on.
I used a discounted cash flow model as a valuation technique for The Walt Disney Company. Using the assumptions listed below, I arrived at an intrinsic value of $117.63 for Disney.
My assumptions include:
- A beta of .96, which was un-levered at the industry average and then re-levered at Disney's capital structure.
- Risk-free rate of 2.16%
- Market Risk Premium of 7.25%
- WACC of 8.17%
- Terminal Growth Rate of 3%
Porter's Five Forces
When looking at The Walt Disney Co. through the lens of Porter's Five Forces, it is important to note that the company is well-positioned in its respective industries and markets to grow current and capitalize on new business strategies.
Consumer Power: Low
Consumer power is low for Disney because of the brand that the company has developed for itself. Consumers can go to different theme parks or watch different animated characters, but they will not be able to gain the unique Disney experience.
Supplier Power: Low
Supplier power is low for Disney because they have the ability to control the channels that their content is distributed through. Looking forward, Disney's new direct-to-consumer services will decrease supplier power even further.
Potential of New Entrants: Low
The potential for new entrants into the same business as Disney is also low because developing a global brand similar to this would require a significant capital investment. It relates back to the unique brand that the company has developed over the period of its operations.
Threat of Substitutes: Low
The threat of substitution is low. Disney has built a reputation that sets it apart from most other brands. It has created its own original content, animated characters, and uniquely themed parks and resorts that make it difficult to find a similar substitute and experience.
The competition for Disney is moderate. Disney competes with various cable networks, broadcasting channels, and entertainment studios for viewers, subscribers, and loyal fan bases concerning ESPN, the ABC Network, Marvel Entertainment, and Lucasfilm. It competes with other sports channels, such as Fox Sports, and other entertainment studios, such as Warner Bros.
Competition and Partnerships: As Disney continues to innovate and develop its streaming services, it risks its working relationships with its current partners in the distribution of its media content, such as Netflix. Disney has plans to end distribution deals with Netflix with the launch of their own Disney-branded direct-to-consumer streaming service.
Changes in Business Strategy: As Disney makes the necessary changes to implement its new streaming services, it risks increasing costs related to restructuring and distribution. Additionally, as they enter a new market, they risk the failure of their new services.
Strong financial performance mixed in with new, innovative strategies for combating issues surrounding ESPN, Disney is still an attractive value play. Go long.
Disclaimer: Information and opinions contained in this report have been obtained or derived from sources believed to be reliable, but no guarantees can be made regarding the accuracy of the information provided by the original sources. All opinions expressed are subject to change without notice. This research report is not tailored to the investment needs of any specific person and is provided for information purposes only.
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.