Here Are The Key Triggers For Disney’s Stock – Part 1

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While Disney (NYSE:DIS) is facing some pressure on revenues due to lower television ratings, ESPN is riding high with the success of its sports programming, boosting the company’s overall top line. We believe the network will maintain its leadership position in sports programming for the foreseeable future as it has renewed most of its key programming deals in the past few years. ESPN has seen an uptick in viewership in the recent past, and this has boosted advertising revenues for Disney. Over the next few years, we expect ESPN’s revenues to grow, primarily on higher advertising sales and subscriber growth. However, EPSN has been spending heavily on acquiring programming rights and it has weighed on the network’s bottom line in the recent past. This suggests that there is room for stock price movement depending on the viewership trends in the upcoming sports events. We believe that growth in ESPN viewership and subscribers can be prime triggers for Disney’s stock. Additionally, Disney’s other cable networks and broadcasting are facing the heat from the rise of digital platforms such as Netflix and Amazon Prime. This has resulted in lower ratings and, if this trend continues, it could drag Disney’s stock price lower.

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ESPN Ratings Grow By 5% (+10% Upside To Stock Price)

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Sports programming across the networks has resulted in higher viewership. From NBC’s Winter Olympics coverage last year to Fox’s recent coverage on Women’s Soccer Worldcup, ratings have grown significantly. The viewership growth in sports programming is great news for ESPN. The network has been the leader in sports programming and will remain so for the foreseeable future, as it has renewed most of its programming deals for long term, including NFL. Looking at 2014 ratings, ESPN was the most watched cable network with a 3% uptick in ratings in 18-49 demographics. [1] The network’s advertising revenues also grew by 5% to over $4.50 billion in calendar year 2014. Higher viewership will not only boost advertising revenues but also subscription revenues. While we acknowledge the network’s subscriber base declined last year, we believe that demand for sports programming will drive ESPN’s subscriber growth in the coming years. A 5% ratings growth annually for ESPN could add incremental revenues of close to $5 billion over the next few years, adding 10% to our price estimate and EPS for 2021. This growth will not only come from higher ad pricing but also from higher subscription fees and EBITDA margins.

Broadcasting And Cable Networks Ratings Decline By 5% (-10% Downside)

Most of the broadcasting as well as the cable networks have seen a decline in ratings in the recent past amid the rise of alternative video platforms such as Netflix and Hulu. Advertisers are allocating higher budgets towards digital media and the proportion of television in overall advertising spend is declining and is expected to continue this trajectory, according to research by Strategy Analytics. [2] While ABC managed to do well in the 2014-15 television season, the overall trend in broadcasting remains negative. Over the past few years, cable networks have risen in popularity owing to their specific focus. This has helped them create a loyal audience base and, consequently, broadcast networks have suffered in terms of viewership. However, in the recent past, even cable networks have been hammered, owing to the rise of alternative video platforms. For instance, The Disney Channel saw a 21% decline in ratings among kids 2-11 and 6-11 in 2014. [3] Accordingly, we expect broadcasting ad revenues to decline in the coming years as lower volumes will offset higher ad pricing. Similarly, we expect a little growth in the cable networks (except ESPN) such as The Disney Channel owing to the growth of alternative video platforms.

Having said this, it is possible that we are underestimating the shift in growth of digital platforms and social media, as the decline in ratings is not limited to Disney’s networks but far more widespread to most of the broadcasting as well as cable networks. Other broadcasting networks had declining viewership as well, including Fox (down 21%) and while NBC (which slipped 7%). [4] Also, advertisers are allocating more of their budgets towards digital media. While the cable networks’ advertising revenues grew only 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 a 65% jump in social media ad revenues. [5] Accordingly, a 5% viewership decline annually for Disney’s broadcasting and cable networks could lead to a revenue loss of over $3 billion over the next few years, which produces a decrease of around 10% in both our price estimate and EPS for 2021. Here, we still assume ad pricing to grow at a low-single-digit rate. The impact will come not only from lower ad and subscription revenues but also from lower EBITDA margins.

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Notes:
  1. ESPN No. 1 in Cable Ratings for 2014, Variety, Jan 2, 2015 []
  2. 2015 Ad Spend Rises To $187B, Digital Inches Closer To One Third Of It, Tech Crunch, Jan 20, 2015 []
  3. The Ever-Updated TV Upfront Chart, Advertising Age, March 10, 2015 []
  4. NBC Set To Eke Out 2014-15 TV Season Demo Win Over CBS Thanks To Super Bowl, Deadline, May 19, 2015 []
  5. MAGNA GLOBAL Forecasts Global Advertising Revenues to Grow by +4.8% to $536 billion in 2015, IPG Mediabrands, Dec 8, 2014 []