Disney (NYSE:DIS) will report its Q3 fiscal 2013 earnings on August 6, and the focus will be on the impact of ratings pressures primarily on ESPN. In the last quarter, the sports network bounced back in its ratings, resulting in advertising revenue growth of 4%. However, the recent decline in ratings and increased competition from NBC and Fox can hurt the advertising revenues for the company.
Disney’s growth will find support from higher affiliate fees, licensing and syndication. Additionally, we expect the movie business to do well on the back of its box-office so far this year and a solid lineup for the rest of the year.
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ESPN Ratings Decline Amid Increased Competition
According to our estimates, ESPN networks constitute roughly 40% of the company’s value. The sports giant derives its value from the high fee that it charges for its sports programming from close to 100 million subscribers in the U.S. The network charged an estimated subscription fee of $5.05 in 2012.
Going forward, we expect the growth in the subscription fee to slow due to the pressure from pay-TV service providers and increased competition primarily from Fox 1 Sports, which will launch this August. While the competition between Fox and ESPN for sports rights will be limited because ESPN recently renewed most of its major contracts, Fox will be competing for advertising dollars, which could hamper ESPN’s advertising growth.
The network’s ratings have tumbled recently. In the Apr-Jun quarter of 2013, ESPN was down 32% in primetime and 20% in total day average viewership compared to the year before. On the other hand, NBCSN, Golf Channel, MLB Network, NFL Network and Fox Soccer, all saw increases in year-to-year viewership. The network explained declining ratings were due to the absence of Euro 2012, and more importantly, the lack of a classic Eastern Conference Finals series. We believe that ESPN will face pressure in the near term due to its declining ratings. However, the outlook in a longer run remains stable due to its exclusive sports contracts.
Growth In Disney’s Theme Parks And Movie Business
According to our estimates, Disney’s theme parks business contributes close to 19% to the company’s value. Theme parks business has been doing well and provides stable cash flows for the company. Earlier in Q2, 2013, theme parks revenues increased by 14% to $3.3 billion due to the timing of holidays.  Earlier in June, following the pattern of annual price increase at its resorts, the company raised its single-day admission prices close to 10% at its theme parks in Florida and California. (Read – Disney Hikes Theme Park Ticket Prices But It Means Little For Shareholders) The price increase will help theme parks revenues. However, the growth in revenues maybe muted in this quarter due to shift of holidays to the first quarter this year.
Disney’s studio division contributes close to 8% to Disney’s value. In the quarter ended March 2013, the company’s studio income surged to $118 million as compared to a loss of $84 million during the same period in 2012.  Disney Studios has seen a fantastic year so far, thanks to the success of Iron Man 3, Monsters University and Oz The Great and Powerful. (See – Disney’s Monsters U. And Iron Man 3 Show The Benefits Of Studios Unit) However, The Lone Ranger has been a disappointment for the studio and it could lead to a loss of $150 million.  Disney’s solid lineup for rest of the year includes Planes, Thor: The Dark World and Frozen. We believe that Disney Studios is on the right track with a strategy focused on fewer big budget releases. While this is a risky strategy, it is well worth for Disney given its several other cash cows including ESPN and theme parks.
Our price estimate for Disney stands at $66, which is roughly in line with the market price.Notes:
- Disney’s SEC Filings [↩] [↩]
- Disney’s ‘Lone Ranger’ Could Lead to $150 Million Loss, The Hollywood Reporter, Jul 7, 2013 [↩]