disney6__140311194550-275x165That’s the eyebrow raising conclusion Cowen and Co’s Doug Creutz reaches today in a bracing in-depth analysis of Disney‘s profits. The analyst has been cool on Disney for years and remains so even as company shares touch new all-time highs (including one today). But he says that ESPN has been its “primary driver of growth over the last 10 years” and fueled “the expensive transformations that Disney has undergone since Bob Iger assumed the CEO role in 2005.” Despite the much-heralded outlays for Pixar, Marvel, and theme park upgrades, returns on invested capital (ROIC) during the past decade for the other broadcast, movie, digital, and theme park businesses “have been pretty pedestrian.”

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ESPN SportsCenterCreutz says he has been trying to make this kind of analysis for about three years but was stymied by the scant details Disney offers about ESPN’s profits. He thinks he found a good work-around, though, by assuming that the sports net looks a lot like near-pure-play cable network companies including Discovery, Scripps Networks, and Viacom (where Paramount’s earnings “are a pittance compared to the cable network contribution”). That leads him to believe that ESPN consistently delivers a ROIC of about 48% because it “can set prices for its customers, and to a certain extent, for its suppliers” at the sports leagues. Pay TV subscribers pay about $5.50 a month for ESPN, even if they never watch it. 

Once armed with ROIC estimates for ESPN, he figures the average annual return for the rest of the company during the past decade was about 8.5% — slightly higher than Disney’s 7%+ average yearly cost to borrow money from banks and investors. “When we say that we view the economics of [Disney’s non-ESPN businesses] as being mediocre, this is what we’re talking about.” What’s more, the company without ESPN “has significantly lagged” its Big Media peers, “which have simply benefited from the rising value of content tailwind and have essentially sat on their hands and returned free cash flow to investors” by raising dividends and repurchasing stock.

As for Iger’s big acquisitions and investments, they “may have retarded Disney’s [ROIC] improvement rather than accelerating it. … If Disney’s investments during the Iger era have all been generating wonderful returns on capital, why aren’t we seeing it in the overall results? Where is the benefit from Pixar showing up?”

For the record: Creutz has had a neutral rating on Disney since early 2008. Since then company shares have appreciated 180% while the Standard & Poors 500 was +39%.