Disney’s Thicker Margins Compensate For Slow Revenue Growth
Disney’s (NYSE:DIS) overall revenue growth of just 3%, and growth of only 2% in its media networks were the disappointing parts of its Q4 fiscal 2012 results. However, the company has managed to improve its margins due to an improvement in subscription and ad pricing, as well as better results from its parks & resorts business. This seems to be a common case with most media companies – while the revenue growth has been slow, margins have improved due to pricing increase and the growth in high margin digital licensing revenues.
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Ratings Pressure Is More On Broadcasting Than Cable
While the increase in subscription revenue due to higher pricing has aided Disney’s media networks, the advertising revenue was flat as the higher ad pricing was mitigated by ratings decline. This decline was not just seen in Disney’s ABC broadcasting network, but also its flagship channel ESPN. Some of this can be attributed to broadcast of Olympics and this leads us to believe that the decline in ESPN’s viewership is not a longer term trend, but rather a short-term anomaly. This assumes that ESPN will be able to maintain its programming lead over the other sports networks in the future. However, ABC broadcasting’s revenues were flat even for the whole fiscal year 2012, implying a sustained decline in viewership. Disney needs to offset this decline with higher licensing and retransmission deals. CBS (NYSE:CBS) seems to be doing a pretty good job at this.
However, ABC broadcasting is a relatively small contributor to Disney’s value (~10%) when compared to ESPN (~45%). As long as ESPN continues its growth, investors needn’t be too concerned. In addition to this, parks & resorts have done well due to higher attendance and higher per capita spending. However, given the high amount of capital expenditures, the value contribution remains much lower than that of ESPN (<15%).
Our price estimate for Disney stands at $55, implying a premium of about 15% to the market price.
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