In a surprising turn of events, The Walt Disney Co. (DIS, Financial) has reportedly engaged in preliminary discussions regarding the potential sale of its U.S. TV network ABC. According to sources familiar with the matter, these talks have occurred with Nexstar Media Group Inc. (NXST, Financial), a prominent regional TV station operator. The news adds another layer of complexity to Disney's already tumultuous year.
A year of challenges for Disney
Over the past year, Disney has faced significant challenges, with its stock witnessing a sharp decline of approximately 23.73%. This decline is partly attributed to a series of headwinds, including industry strikes by writers and actors, disputes with cable provider Charter Communications (CHTR, Financial) and the struggle of its Disney+ streaming service to turn a profit.
However, despite these short-term setbacks, Disney's long-term prospects appear to be more resilient.
Financial performance
Over the past three years, Disney has demonstrated a 2.7% growth rate in revenue per share. This figure positions the entertainment giant ahead of 58.16% of companies in the media - diversified industry. However, it is crucial to acknowledge that the media landscape is rapidly evolving, primarily driven by the ascent of streaming services.
In terms of the three-year Ebitda growth rate per share, Disney stands at -16.9%, placing it below 77.40% of its peers. This decline also highlights the challenges confronting the traditional TV industry.
Looking to the future, Disney's projected three to five-year earnings per share growth rate without non-recurring items is a promising 21.66%. This places it ahead of 79.41% of companies in the secotr sector, indicating it is strategically positioning itself for long-term growth.
Examining the price-earnings ratio on a trailing 12-month basis, Disney currently has a multiple of 68.68. This valuation metric positions the company behind 84.70% of its competitors, suggesting the stock may be trading at a premium compared to other companies in the same sector.
Strength of Disney's intellectual property
Despite the short-term headwinds, Disney boasts a formidable collection of intellectual property that holds significant long-term potential. Iconic characters and brands such as Mickey Mouse and Marvel Comics continue to resonate with audiences worldwide. These assets serve as the foundation for a diverse range of revenue streams, including merchandise sales, licensing agreements and content for streaming services and theme parks.
The company's recent financial reports reflect this strength. For the fiscal third quarter ending July 1, the Disney Parks, Experiences and Products segment recorded $8.3 billion in revenue, a 13% increase compared to the previous year. The operating income for this segment surpassed that of the Media and Entertainment Distribution division, highlighting the importance of Disney's additional revenue streams beyond its traditional TV business.
Disney's strategy in the streaming space
While Disney faces challenges in its linear TV business, particularly with the ABC network, the company is actively adapting to the evolving media landscape. Disney CEO Bob Iger has acknowledged the unmistakable trend of cord-cutting, driven by the popularity of streaming services. However, the company's strategic advantage lies in its ability to leverage its beloved brands and franchises in the streaming arena.
To boost profitability, Disney is focusing on raising prices for its Disney+, Hulu and ESPN streaming products. Simultaneously, the company is capitalizing on the growing advertising market for streaming TV, which offers precise targeting capabilities. Notably, a significant portion of new Disney+ subscribers have opted for ad-supported tiers, showcasing the potential for ad revenues.
The challenge of ESPN in the streaming era
One of Disney's most significant challenges in its transition to streaming is the future of ESPN. The sports-focused channel has traditionally been a cornerstone of cable bundles, even for non-sports households. As the industry moves toward disaggregation, Disney must navigate the shift while maintaining ESPN's profitability.
The potential for an ad-supported streaming service for ESPN could be a lucrative opportunity, given the channel's sought-after sports content. Additionally, the advertising market for streaming is considered healthier than that for linear television, providing further potential for revenue growth.
Investing in Disney amidst challenges
Despite the recent setbacks and ongoing challenges, Disney's stock now trades at 16 times fiscal 2024 earnings estimates. While the path to recovery may be gradual, the company's strong intellectual property portfolio and strategic adjustments in streaming pricing and advertising position it for long-term success.
Investors should weigh Disney's potential to rebound as it navigates the evolving media landscape. While short-term uncertainties persist, the company's century-long history of adaptation and innovation suggests that it may emerge stronger in the years to come.
In conclusion, Disney's discussions regarding the potential sale of ABC reflect its willingness to explore strategic options in response to industry shifts. As the company continues to reshape its business model, investors should monitor its progress and its ability to leverage its iconic brands in the dynamic world of media and entertainment.
