How Is Disney Channel Trending For Walt Disney?

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Disney’s (NYSE:DIS) Disney Channel has gone through tough times amid declining ratings in the recent past. The network ratings plunged 21% among kids 2-11 and 6-11 in 2014. [1] However, an important driver for Disney Channel is the monthly subscription fees, which has seen a steady growth in the past few years. The overall ratings for most of the cable networks are down due to a combination of growth in alternative video platforms and changes in the measurement methodology used by Nielsen. Since Disney Channel does not air regular commercials, the decline in viewership may impact its subscriber base, which has already slipped by more than 3% in the last four years. [2] However, even if the network were to hold on to its current penetration levels of around 91% among the U.S. pay-TV households, the overall subscriber base will increase in the coming years. Moreover, if the ratings on other platforms are also accounted by Nielsen, Disney Channel can negotiate on pricing for licensing of its content, which will offset the revenue declines, if any, seen on the traditional television front.

We estimate revenues of around $53 billion for Disney in 2015 and EPS of $4.90, which is in line with the market consensus of $4.89, compiled by Thomson Reuters. We currently have a $105 price estimate for Disney’s shares, which is close to the current market price of $105.

 

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Expect Continued Growth In Subscription Fees

Subscription revenues have been on an uptrend for Disney Channel. The network’s estimated subscription revenues grew from $910 million in 2007 to $1.42 billion in 2014. This can primarily be attributed to growth in estimated monthly subscription fees from $0.83 to $1.21 during the same period. Looking at the network’s subscriber base, it increased from 84 million in 2007 to 100 million in 2010 but declined to 97 million in 2014. [2] It must be noted that Disney Channel’s penetration among the U.S. TV households has remained fairly stable in the range of 91% to 95%, which is very high. This indicates consistent demand for the network and we expect this figure to remain fairly stable going forward as well. Disney Channel’s popularity with kids is due to its quality content and no external advertisements and this should continue to drive growth in its monthly subscription fees. Also, contracts between content companies and pay-TV service providers include prescribed yearly increments for fee per subscriber. These contracts are long-term, spanning across several years. Moreover, the programming costs have been rising across the board leading to fee increase as Disney passes on some of the high cost burden to the pay-TV operators. Accordingly, we estimate the monthly subscription fees to be around $1.50 and a stable penetration of the network will take the subscriber base to around 103 million by the end of our forecast period, primarily due to a growth in pay-TV households. This will translate into subscription revenues of $1.85 billion and an estimated EBITDA margin of 46% for Disney Channel will translate into EBITDA of $840 million, representing 3% of the company-wide EBITDA. While ESPN Channels and Disney’s theme parks account for more than 55% of the company’s overall revenues, Disney Channel’s contribution is less than 5%, according to our estimates. Accordingly, any changes to our estimates will have minimal impact on the company’s stock price.

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Notes:
  1. The Ever-Updated TV Upfront Chart, Advertising Age, March 10, 2015 []
  2. Disney’s SEC Filings [] []