Disney’s Multi-Platform Distribution Deals Can Lift Margins And Outlook

+8.83%
Upside
114
Market
124
Trefis
DIS: Walt Disney logo
DIS
Walt Disney

Disney (NYSE:DIS) recently signed deals with Cablevision and LG that are aimed at taking advantage of the growth in broadband-enabled devices and changing consumer preferences. The deal with LG involves allowing owners of LG’s smart TVs to rent Disney’s 3D movies, whereas Cablevision is bringing several of Disney’s channels to its subscribers on a variety of devices such as PC, smartphones, tablets and gaming consoles. [1] [2] Although this deal involves a limited number of subscriber, they will be directly additive to profits by opening up additional channels for monetizing the content that Disney has already produced. Assuming that Disney continues to push in this arena, its company-wide margins can see further growth in the future.

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Even though our value estimate is only 5% above the market price, a lot of it is hinged on our forecast around profit margins. Close to 60% of Disney’s value comes from its cable networks for which we forecast flat margin growth.

We believe that the margins are already at very high levels and there will be pressure from pay-TV service providers to stall the growth in the carriage fee for cable channels. However, multi-platform distribution deals could act as a growth catalyst for these margins provided that the size of the revenues from such deals becomes substantial. Over the course of next 5 years, we do expect Disney and other media companies to increasingly provide on-demand content over the internet, thus growing this newly opened profit stream.

Whether or not the additional profits from these deals will be able to compensate for pay-TV industry pressure over the carriage fee, is something that is unclear as of now. Disney has a high operating leverage and any improvement in monetization of its content will lead to margin growth.

Our price estimate for Disney stands at $55.50, implying a premium of about 5% to the market price.

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Notes:
  1. LG’s Smart TV platform starts renting out Disney 3D movies, offers new buyers $50 worth, Engadget, Oct 6 2012 []
  2. Cablevision inks deal with The Walt Disney Company, brings WatchESPN and more to subscribers, Engadget, Oct 4 2012 []