BMO Remains Cautious On ESPN, But More Positive On Disney Stock

While investors have reason to be concerned with subscriber metrics at Walt Disney Co DIS's ESPN unit, the stock offers a balanced risk-reward profile, according to BMO Capital Markets.

The Analyst

BMO's Daniel Salmon upgraded Disney from Underperform to Market Perform with a price target lifted from $95 to $100.

The Thesis

Data points collected by Nielsen show ESPN's traditional television subscribers are declining by 3 percent year-over-year, Salmon said in the upgrade note. But at the same time, Disney's virtual video programming distributor, or vMVPD, is gaining subscribers, as it is included in vMVPD packages at YouTube TV, Hulu with Live TV and others, the analyst said in a Wednesday note.

Disney's strategy of focusing on the broader shift to direct-to-consumer and over-the-top content is commendable, and the company is concentrating on long-term growth opportunities, Salmon said. Disney's new DTC and international business segment is positive, as it creates a dedicated division focused on the future of the media business, he said.

Disney's long-term portfolio of intellectual property remains attractive despite ESPN's near-term subscriber challenges, the analyst said. Recent product innovation, including ESPN+ and broader company initiatives, make any linear sub pressures "relatively less important" to investors, he said.

BMO's revised $100 price target implies a 9.2x multiple on 2019E EV/EBITDA and a 12.9x P/E multiple. These valuation metrics imply a premium to the 7.8x 2019E EV/EBITDA and 12.5x P/E multiple seen in the broader entertainment peer group.

What To Look For In Q2

Heading into Disney's fiscal second-quarter earnings report May 8, Salmon said he'll be looking for answers to five questions:

Is management negotiating any clauses to take ESPN direct-to-customer into contracts with both vMVPDs and traditional MVPDs?
What impact will the shift of advertising sales to the new DTC/international segment pose with media networks management on a daily basis?
How does the bidding war for Sky News fit into the broader plan for Disney?
What will Jimmy Pitaro do differently than John Skipper as president of ESPN in terms of setting the strategic trajectory?
Is a "all-in-one" option available to combine ESPN+, Disney DTC and potentially Hulu into one service? If so, where would it rank in terms of customer preferences against other streaming platforms?