Charter Dispute Not Substantial – The Hollywood Reporter
Wells Fargo analyst Stephen Cahal cut his stock price target in The Walt Disney Company by more than $30 on Tuesday, but stuck to its “overweight” rating, anticipating that over time investors’ focus will shift from near-term challenges to longer-term upside.
His comment comes at a time when analysts have been intensely debating the outlook for Disney amid various challenges, from cord cuts and streaming losses to advertising market clouds, and questions about the company’s future business mix.
“For us, Disney is the most interesting stock in the media: a powerful intellectual property company that is down on its luck, with a Covid price and historically low multiples,” he wrote. Providing in-depth information on the state of bullish and bearish investors, he averaged the two scenarios for a new stock price target of $110, down from the previous $146.
In summarizing the Bears’ arguments, Cahal points to the group’s recent lack of major content hits. “Disney hasn’t been a hit factory lately, and it takes a lot of time to improve content. Investors’ concerns explained that Disney’s box office and Disney+ subscriptions will suffer, especially with higher prices.” This creates more downside for Direct-to-Consumer (DTC) estimates with Our drop case is down the street on subs and DTC’s operating income.”
Other elements in the downside include that “Disney isn’t spending as much on content as investors think: $10 billion, excluding sports/shares” and concern that ESPN will not transition well to streaming, “which creates long-term profits for each company”. “The Leading Wells Fargo Expert”. The latest concern relates to CEO Bob Iger’s recent indication that the Hollywood giant could sell linear TV networks, with the exception of ESPN. Cahall summed it up this way: “Disney won’t be able to successfully get rid of a non-core line.”
In contrast, the argument in favor of Disney centers on its “impressive intellectual property library” that has strong appeal to children and families, which make up nearly two-thirds of Disney+’s core subscribers, Kahal said. Additionally, the streamer is now “about price/margins, not sub-growth.” “Disney+ is significantly underpriced compared to Netflix in terms of average monthly revenue per user (ARPU) per billion dollars worth of content, including the Disney library, so we’re optimistic about higher prices,” he said.
Other reasons for optimism are the “phenomenal” Disney Parks, Experiences and Products (DPEP) business, planned sale of linear TV assets and projected DTC breakeven by Q3 FY24, along with what Cahal estimates Hulu synergies cost $1 billion after Comcast put its stake in. Disney’s 33 percent stake in streaming equipment.
He even sees an opportunity in recent heated headlines about Disney’s carriage dispute with cable giant Charter Communications. “ESPN = Non-Operating Income Driver + Charter Dispute Speeds Change,” Cahal expressed his opinion in the form of an equation.
His calculations: “There are arguably over 60 million households who are sports fans based on viewership across major sporting events.” When ESPN had about 100 million subscribers in 2015, Cahal explained, he estimated the number of non-sports subscribers to be around 40 million, “so ESPN affiliate fees have been maximizing revenue but at lower prices than sports fans.” “Now, non-sports fans represent less than 20 percent of (pay-TV) subscribers, so it makes more sense for Disney to release the DTC and price-discriminate sports fans who are more flexible in pricing.”
The analyst expects ESPN broadcasts to launch early for fiscal 2025 and “ESPN’s EBITDA will be approximately $1 billion in fiscal years 2024-2026, down from about $4 billion in fiscal 2021.”
One of his other main arguments is that “the charter dispute is not as material to Disney as the Bears believe.” Cahal explained, “While we don’t disagree with Charter’s assessment that the pay-TV ecosystem is broken by packages and fee structures that aren’t consumer-friendly, we’re also not convinced that this is a pivotal moment for Disney. First, if there is an ongoing charter obfuscation or Permanent decline in Disney content, subscriptions are likely to reappear on other TV services including Disney’s streaming services, Hulu Live TV, YouTube TV, etc. Given the availability and choice of content services today – and their ubiquity – It doesn’t make sense that a decrease in charter size would keep viewers unsubscribed, especially sports fans during football season.
Additionally, he noted, Disney likely represented “a larger portion of viewership than Charter indicated”.
Overall, the Wells Fargo analyst takes a long view on Disney. “Taking the best out of each (bull and bear) argument,” Cahal concluded, “we think the short term is riskier due to higher DTC subs, charter titles, Hulu’s and overall hits for theme parks.” “As we approach calendar year 2024, we believe that the long-term DTC earnings/margins story begins to emerge as a key reason to own Disney in the term.”
He also shared why he sticks to recommending Disney stocks with his “Overweight” rating, explaining: “We think bad news is mostly hidden.”
