Disney Investors: Stop Worrying About ESPN

Credit Suisse's Omar Sheikh maintained an Outperform rating for Walt Disney Co DIS, with a price target of $130. He pointed out that the company had options to offset the potential deceleration of growth at ESPN.

Analyst Omar Sheikh said that the “increasingly consensual” expectation of ESPN's growth slowing substantially does not take into account the impact of two defensive strategies that Disney could employ.

“First, DIS can reduce the likely significant usage of shared passwords for WatchESPN, where probably several million users consume the content without paying for it. Second, DIS can use its rights portfolio to create an unbundled product either with niche content aimed at "super-fans"; or for a fuller bundle of content to serve the casual sports fan,” Sheikh wrote.

Walt Disney can pursue both these strategies, either on its own or with third party partners like Amazon, Verizon or Apple. Moreover, both these strategies can be executed “without cannibalizing the core "full fat" product currently being sold via MVPDs,” the analyst mentioned.

Related Link: Why ESPN Fears Are Hurting Disney

The EPS estimates for 2016 and 2017 have been raised from $5.70 to $5.84 and from $6.14 to $6.27, respectively. While investors are focusing on ESPN's slowdown, the overall company generating 9 percent annualized revenue growth and 14 percent annualized operating income, Sheikh pointed out, while adding that Disney had assembled a portfolio of assets that is likely to be able to sustain growth for years to come.

The Credit Suisse report highlighted the flowing datapoints on ESPN:

• Although domestic subscribers declined again in Q1, the rate of decline improved sequentially
• Subscribers had increased since the end of Q1
• Underlying advertising growth came in at 14 percent, with strong scatter pricing, and a significant improvement in the outlook for the upfronts
• Operating income growth was at 8 percent, ex-sports cost phasing and FX.

Piper Jaffray's Stan Meyers on Thursday upgraded Disney from Neutral to Overweight, while raising the price target from $105 to $120. He expects the upcoming film slate to generate significant value over the next five years, despite the deceleration of ESPN growth.

Despite a decline in subscribers, ESPN is likely to grow. “While admittedly this might be an early call, we believe the ESPN overhang will begin to fade out over the next few quarters as Disney demonstrates both affiliate fee growth and deceleration in subscriber declines,” Meyers mentioned.