Disney’s Earnings Should See Broadbased Growth Across Businesses

Good performances by cable networks and filmed entertainment businesses are likely to be the highlight of Disney’s (NYSE:DIS) upcoming Q3 fiscal 2012 earnings, scheduled for release on August 7. On the surface, the company appears to be a diversified media giant, yet almost half of its value comes from ESPN, and close to 60% from all the cable networks combined. Needless to say, ESPN’s performance is the prime driver of Disney’s profits. Below we take a look at what to expect in the upcoming earnings.

See our complete analysis for Disney

ESPN’s Performance Will Be Key

Approximately 45% of Disney’s value can be attributed to ESPN and related channels. The network earns revenues through subscription as well as advertising. ESPN charges a subscription fee (per subscriber per month) which is highest in the industry. This fee has increased from about $3.26 in 2007 to about $4.69 in 2011. The year 2012 has seen a further increase in this fee, and it appears that ESPN is now charging somewhere around $5.15 per subscriber per month. ^[1] This implies that investors can expect continued strong performance from Disney as far as its affiliate fee is concerned.

However, that’s not it. ESPN is likely to put up a good show in terms of ad dollars as well. The ratings have been good thanks to the NBA playoffs and Euro 2012. ^[2] This, coupled with improving advertising spend as evident from the growth of automotive industry, is likely to result in ad revenue growth for ESPN.

Disney Channel Will Play Its Part

Disney Channel is another flagship channel for Disney. It surpassed Viacom’s (NASDAQ:VIA) Nickelodeon in the recent past to become the top-rated channel on cable. The network has averaged close to 2 million viewers (total day viewership) recently, notably ahead of its closest competitor Nickelodeon. ^[3] Although Disney Channel is a much less valued business compared to ESPN, its good performance will be additive to Disney’s results.

Expect Significant Improvement In Film Business Compared To Last Quarter

The results of Disney’s filmed entertainment business were suppressed last quarter due to the failure of its expensive film John Carter. However, this quarter has been a completely opposite story with the success of Blockbuster Avengers, which has grossed over $1.4 billion globally at the box office. ^[4] This is a significant achievement given the typical quarterly revenues that the company achieves from its theatrical releases.

Further benefit from the success of Avengers is likely to spread to the next few quarters as Disney earns a significant portion of its filmed entertainment revenues from DVD and Blu-ray sales. Nevertheless, investors should remember that the movie business only accounts for about 10% of Disney’s value due to its low margins. Moreover, its profits tend to be erratic depending upon the success of individual movies. If one has to bet on Disney, cable networks and broadcasting are the businesses to consider.

Risk To Investors

Investors should remain cautious about the future of ESPN. Although, so far, the channel has been a primary driver of the company’s value given its demand as well as bundling in almost every pay-TV package, the future could be different. It all depends on how things go in the next few quarters. Sports programming costs are rising and pay-TV companies are thinking of excluding expensive channels such as ESPN from certain pay-TV packages catered toward value-conscious customers. Furthermore, competition is likely to develop as rivals invest more in their respective sports channels. Comcast (NASDAQ:CMCSA) – NBC’s bid for Olympics, despite the possibility of losing money, is a good example.

Our price estimate for Disney stands at $51.50, implying a premium of less than 5% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. NBC Sports Network’s Olympic Ambitions, Businessweek, July 5 2012 [↩]
2. ESPN Has Highest-Rated, Most-Viewed NBA Playoffs Ever, ESPN Mediazone, June 12 2012 [↩]
3. USA is Again Number One in Cable Primetime Total Viewers, Disney On Top in Total Day Viewership, TBS Wins Adults 18-49 Primetime For Week Ending July 22, 2012, TV ByTthe Numbers, July 24 2012 [↩]
4. Box Office Mojo [↩]