Disney’s Broadcasting Operations Will Benefit From The Growth In Non-Advertising Income

Disney (NYSE:DIS) has been successful with its cable networks such as ESPN, which contribute around 30% to the company’s value, according to our estimates. This can be attributed to high EBITDA margins of over 45% that Disney enjoys on its cable networks and ESPN’s dominance in sports media. On the other hand, the broadcasting business has been a low value contributor for the media giant, primarily due to lower margins of around 19%. The broadcasting business contributes close to 12% to the company’s overall revenues, but the contribution towards EBITDA is much lower (7% in 2014), reflecting lower margins in this business. Broadcasting networks such as ABC rely heavily on advertising income. The broadcast advertising trends are uneven, as they are driven by various events such as political campaigns and sports. U.S. advertisement spending in 2014 grew only 4%, which was lower than anticipated, and it is likely to remain soft in 2015, according to Magna Global. ^[1] However, ABC has managed to lower the split between advertising and non-advertising income from 70% in 2007 to 50% in 2014. As non-advertising income grows at a faster pace than advertising income, ABC can look forward to stable growth in the long run.

We forecast 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 $104.

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Trends In Advertising Marketplace And Our Estimates

The U.S. advertising market trended weak in 2014, despite the improvement in the U.S. macro-economic environment. Television advertising revenues grew 4.8% for the year, much lower than Magna Global’s spring estimates of 8.6%. While the cable networks advertising revenues grew by 3% in 2014, the broadcast television declined by 4% (excluding Olympics). This dismal performance can be attributed to competition from digital media formats, which saw 28% growth in video and 65% jump in social media ad revenues. ^[1]

Magna Global expects a softer 2015 for the overall U.S. advertising market and a 1.4% decline in television advertising. However, looking at ABC Broadcasting, we expect the revenues to grow steadily in the near term as well as in the long run. We believe that the slower advertising growth will be more than offset by higher retransmission consent and distribution revenues. While ABC’s advertising revenues have declined from around $3.50 billion in 2009 to $2.90 billion in 2014, non-advertising income has grown from $2.30 billion to $3.10 billion during the same period. Accordingly, we estimate overall broadcasting revenues will be around $9 billion by the end of our forecast period and an estimated EBITDA margin of 22% will translate into EBITDA of over $2 billion, representing 7% of the company-wide EBITDA. However, it must be noted that any change in broadcasting revenues wouldn’t have huge impact on our price estimate due to the low value contribution of this business to Disney’s overall price estimate.

Most of ABC Shows Are Seeing Ratings Pressure This Season

Advertising income is largely dependent on television ratings, which have been declining for most broadcasting and cable networks in the recent past. This can be attributed to a shift in viewing habits, which has led to growth in digital platforms. Unfortunately, Nielsen as of now takes into account only traditional television ratings in its calculations, and the media houses are furious about that and rightly so. If there were a better mechanism to know the viewership trends on digital platforms, they could accordingly negotiate licensing revenues, which may help them offset the declines in advertising income on television.

Looking at ABC’s ratings, most of its scripted shows are down in current television season ratings. Marvel’s Agents of SHIELD and Resurrection are down more than 30% in the key 18-49 demographics. However, Scandal, Once Upon A Time, The Goldbergs and Last Man Standing have seen improved ratings. ^[2] Into 30th week of 2014-15 broadcast television season, ABC currently stands at the third spot with a 2.2 rating and 7.9 million average total viewers. This compares with CBS’ 11.4 million and NBC’s 9.0 million viewers. ^[3] The ratings currently are at similar levels seen in 2013-14 season. However, the previous season ratings were down 4% as compared to the prior year season. Given the trends in the advertising marketplace, it appears that the upfront ad sales may continue to see lower volume as was the case last year. Accordingly, more money is likely to shift from television to digital media. But, for ABC, it will be non-advertising revenues that will drive growth in the coming years.

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1. MAGNA GLOBAL Forecasts Global Advertising Revenues to Grow by +4.8% to $536 billion in 2015, IPG Mediabrands, Dec 8, 2014 [↩] [↩]
2. ABC 2014-15 Season Ratings, TV Series Finale, Apr 15, 2015 [↩]
3. 2014-2015 Season: NBC Leads Among Adults 18-49 & CBS Tops Total Viewers Through Week 29 Ending April 12, 2015, Zap2it, Apr 14, 2015 [↩]