How ESPN Is Killing Disney Stock

Disney (DIS) stock has fallen more than 4% in the last week, and ESPN—its flagship sports property—is the culprit.

In case you haven’t heard, ESPN laid off roughly 100 employees last week, including high-profile on-air talents such as Trent Dilfer, Ed Werder, Jayson Stark, Andy Katz and Danny Kanell, in an effort to counterbalance rampant cord-cutting. Since peaking above 100 million subscribers in 2011, ESPN has lost 12 million subscribers as viewers shift their TV-watching habits to the web amid rising cable costs (driven by ESPN’s $7-per-subscriber price tag).

This wasn’t the first ESPN cost-slashing cull. Two years ago, the company laid off 300 employees, most of them off-air, behind-the-camera talent. Four hundred layoffs in two years is never a good look for a company. And it’s hurting Disney stock.

Disney Stock Volatile

During those two years, DIS has been up and down, with a net return of a mere 1%. Mind you, this is at a time when the S&P 500 is up nearly 15% and the Dow Jones Industrial more than 17%.

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If you just looked at the success of Disney’s booming movie-studio business, the volatility in Disney stock might surprise you. In the last five years alone, Disney has released five of the 10 highest grossing films of all time: “Star Wars VII: The Force Awakens” ($2 billion worldwide box office), “The Avengers” ($1.5 billion), “Avengers: Age of Ultron” ($1.4 billion), “Frozen” ($1.27 billion) and “Iron Man 3” ($1.2 billion). Two other Disney movies released in the last year, “Captain America: Civil War” and “Beauty and the Beast,” cracked the top 15.

Alas, movies are but a slice of the Disney pie. Media networks are the biggest slice, accounting for 49% of the company’s profits in 2016. ESPN isn’t Disney’s only media property—it also owns ABC, the Disney Channel and FreeForm (formerly ABC Family). But ESPN is doing enough damage to bring the entire segment down, as lower advertising revenue and higher programming costs at the self-dubbed Worldwide Leader caused sales to come in lower than expected in its fiscal first quarter, reported in February.

Disney’s earnings have now either missed or met consensus analyst expectations in three of the last four quarters. With the company due to report second-quarter earnings next Tuesday (May 9), DIS stock could use an earnings beat in the worst way, if only to stop the bleeding from all the bad press surrounding the ESPN layoffs.

Expectations are lower than usual. Sales and earnings are both expected to grow 3%. For the year, sales are estimated to expand a mere 2.3%, with 4% EPS growth. If true, it would be the weakest top- and bottom-line growth for Disney since the recession.

Can Disney Solve Its ESPN Problem?

At 16 times forward earnings, Disney stock looks fairly valued at current prices, and DIS is actually up more than 6% year to date despite the recent nosedive. But the stock just fell below its 50-day moving average for the first time since before the U.S. election, so that momentum is waning, if not completely gone. This isn’t the first time in the last couple of years that Disney stock has built up a head of steam only to be derailed by disappointing ESPN news.

Disney stock was building momentum until last week's ESPN layoffs prompted a big drop.Will putting 100 high-profile people out of work have the desired effect of righting the ESPN ship financially? Only time will tell. For now, though, the stink of the mass layoffs is convincing Wall Street to steer clear of Disney stock.

Chris Preston

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