Something You Don't See Every Day: The Bull Case For Disney's ESPN

ESPN has been a thorn in the side of Walt Disney Co DIS investors for several years now. However, Morgan Stanley analyst Benjamin Swinburne believes market sentiment about ESPN’s future has gotten way too bearish. According to Swinburne, ESPN could actually be a major driver of Disney revenue growth in coming years.

Sports Spur Disney

“Our analysis of Disney’s upcoming distributor renewal cycle coupled with increased conviction in new streaming bundles suggests ESPN’s distribution revenue growth rate could nearly double from FY16 levels by FY20, turning ESPN from overhang to earnings driver,” Swinburne explained.

Despite what many see as a secular decline in cable TV, Disney’s cable segment still makes up 35–40 percent of Disney’s earnings, with ESPN accounting for 70 percent of the cable contribution. Morgan Stanley estimates that up to 25 percent of Disney’s cable distribution is up for renewal by the end of fiscal 2018. While Disney may not have as much pricing leverage as it has in the past, Swinburne believes the company has more pricing power than the market is expecting.

In addition, Morgan Stanley predicts the rise of streaming bundles could actually improve Disney’s distribution, suggesting ESPN could drive 7-percent Cable EBIT compound annual growth for Disney over the next four years.

Morgan Stanley maintains an Overweight rating for Disney and has raised its price target for the stock to $130.

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