Disney’s Growth Offsets ESPN’s Bumpy Ride

Disney stock is a notable laggard so far this year, up just 1% year-to-date, as lingering worries over ESPN subscriber losses weigh on the stock. The good news is that things are looking up for the entertainment giant.disney-discount

Investors eagerly awaited Disney’s second-quarter results last month, as 2017 has been a turbulent year for the company so far.

Disney’s core cable networks business is under pressure from falling subscriber numbers at ESPN.

But Disney’s parks and resorts businesses are thriving, as well as its movie studios. With the onset of the summer vacation season, Disney’s parks and resorts business are geared up for growth, particularly in China. And, the summer movie season should benefit Disney’s movie studio business.

These segments generate enough growth to offset the ESPN concerns. Thus, Disney remains a world-class brand with plenty of future growth potential.

ESPN Worries Weigh on Disney Stock

In its May 9 earnings report for its fiscal second quarter, Disney said it earned $1.50 a share, on revenue of $13.34 billion. It was a mixed quarter; Disney’s earnings beat expectations by $0.09 per share, but revenue fell short of analyst estimates by about $110 million.

On a year-over-year basis, Disney’s revenue and adjusted earnings per share increased 3% and 10%, respectively. Growth was spread across Disney’s segments. Its media networks and parks & resorts businesses fared the best, with revenue growth of 3% and 9%, respectively. The studio entertainment posted a 1% revenue decline, while consumer merchandise sales fell 11% for the quarter.

Once again, analysts fixated on Disney’s media networks segment, which houses its cable and broadcast television networks. Disney’s television properties include ABC, ESPN and The Disney Channel.

Investors continue to worry about ESPN’s falling subscribers. The flagship cable sports network has shed subscribers over the past year, as cord-cutters ditch expensive cable packages in favor of cheaper streaming services. This caused operating profit to decline at ESPN once again.

However, Disney’s overall cable network revenue increased 3% last quarter. It appears investors are overly panicked about the fate of ESPN.

Rumors of ESPN’s Demise? Greatly Exaggerated

The reason why Disney continues to generate growth, even at its cable networks, is because of a key competitive advantage that ESPN enjoys: live sports.

U.S. consumers still love sports, but  sports must be watched live. This is what insulates ESPN against the proliferation of streaming services and the widespread adoption of skinny television bundles.

Unlike television shows, sports cannot be binged. This gives ESPN the ability to retain pricing power, when it comes to advertising revenue. Indeed, Disney reported higher affiliate and advertising revenue growth at ESPN last quarter. As long as ESPN retains the rights to popular sporting events such as Monday Night Football and NBA basketball games, it will still be watched by millions of consumers.

Cable network operating profit declined 3% last quarter, due largely to higher programming costs at ESPN. However, Disney recently deployed a major round of cost-cutting at ESPN, when it laid off around 100 anchors, reporters, writers, and production staff.

As revenue continues to grow and costs come down, Disney’s earnings growth should remain intact. And, Disney’s other properties are performing well. Parks and resorts revenue rose 9% to $4.3 billion for the quarter. Segment operating profit increased 20%, thanks in large part to the opening of Shanghai Disney.

Studio entertainment revenue decreased 1% for the quarter, but Disney deserves a lot of credit for even getting close to last year’s revenue number. A year ago, Disney’s fiscal second quarter 2016 benefited from the huge theatrical release of Star Wars: The Force Awakens and Zootopia.

This year, results were not as strong for Rogue One: A Star Wars Story and Moana in the current quarter. Fortunately, Disney had Beauty and the Beast to pick up the slack. Overall, studio entertainment operating profit rose 21% last quarter.

Buy Disney Stock on Dips

Disney shares have had an up-and-down year, but the long-term picture remains bright. Worries over ESPN are overblown. It is still the No. 1 sports network in the U.S.

And, Disney will benefit from growth across its business segments. There will be plenty of huge movie releases for years to come, and the Shanghai Disney resort is just beginning to grow.

Rather than be put off by Disney’s quarterly results, investors should consider buying Disney stock on any dips.

 

Disclosure: The author is personally long DIS.

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Published by Wyatt Investment Research at