It’s a bad day for Wall Street generally, but it’s especially dreary for Disney: Its shares are down 5.2% in afternoon trading — for a 10.3% drop so far this month — after Barclays’ Kannan Venkateshwar downgraded the stock to “underweight.”
This is the latest in a series of wary reports as analysts look past the success of Star Wars: The Force Awakens to potential problems — including likely continued subscriber losses at ESPN, the company’s biggest profit driver. It had 92 million subscribers at the end of the 2015 fiscal year, a drop of 3 million from 2014 and down 6 million from 2013.
The sports network “suffers from a unique problem” among cable networks, Venkateshwar says: About 87% of its costs are fixed from long-term programming rights agreements and production needs, although revenues from ad sales and affiliate fees are variable.
The analyst adds that ESPN carries about $53.4 billion of programming commitments that aren’t reflected on its balance sheet.
That may become untenable if subscriptions continue to fall.
“In order to further mute the impact on costs, we believe Disney may have to walk away from some of the upcoming sports contracts,” Venkateshwar says. “Disney’s recent decisions in this context on not negotiating for renewal of NASCAR, French Open Tennis, and World Cup Soccer are interesting data points in this context.”
He adds that it will be “interesting to see” whether ESPN renews its deal with the Big Ten in 2017.
The sports channel “will likely have to re-invent itself in some form.” But that will be difficult. It can’t just go online and sell programming directly to consumers yet because it doesn’t have streaming rights to all of its sports matches.
“ESPN’s flagship Monday Night Football games are a good example with Verizon having the mobile streaming rights to smart phones,” Venkateshwar says.
What about the movie studio? Here, too, the analyst sees potential problems — especially, strange as it may sound, at what’s seen as a success story: Pixar.
Disney agreed in 2006 to pay $7.4 billion for the animation studio, nearly twice what it paid for Lucasfilms. But Pixar movies are expensive to make and market, and average $636 million in box office sales. At that rate “the substantial premium paid for the asset will still take a long time to recover, even assuming potential future successes like Frozen.”
Venkateshwar also isn’t sold on the Shanghai Disney Resort, due to open on June 16. Although it’s “likely to see good traffic,” some of that may be cannibalized from the tourists who now go to Disney theme parks in Hong Kong and Tokyo.
Others share some of his concerns.
BTIG’s Rich Greenfield rattled many investors on December 18 — the day Star Wars opened — when he cited ESPN concerns in downgrading Disney to “sell.” On January 5 Macquarie Equities Research’s Tim Nollen downgraded to “neutral.” On January 7 Bernstein Research’s Todd Juenger slightly lowered his earnings estimates. And yesterday Nomura’s Anthony DiClemente dropped his target price by 5% to $115.
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