When a company announces earnings that meet analysts’ expectations and still get penalized by having their stock price tank, something doesn’t seem right. That is exactly what just happened to the company that has what is considered to be the 13th most powerful brand in the world, Walt Disney. After announcing quarterly earnings of 68 cents per share, Disney saw their stock drop 5%, even though this was in line with analysts’ expectations. Such is the stock market, that fundamentals that should drive stock price often give way to emotional trading.
Apparently the knock some have on Disney is that some of its assets are not very profitable, despite the fact that they drive revenue. ESPN and the Disney Channel together drop more profit to Disney’s bottom line than all the rest of Disney’s operations combined, so ESPN get’s lots of scrutiny from Wall Street and everyone else.
Wunderlich Securities estimates ESPN alone has a value of $40 billion, making it the most valuable media asset around, according to the analysts. Meanwhile, Disney as a whole is only valued at $84 billion, based on the market value of its stock, and this heavy reliance on ESPN is something Disney senior management definitely works to diversify. The thing is, Disney is already a widely diversified company when you look at their assets.
In addition to ESPN, which Disney bought from CapCities/ABC in 1996, in what was then the second biggest acquisition in U.S. history with a $19 billion purchase price, Disney has assets that are all over the board. The company’s holdings include the theme parks they are so well known for, along with their studios, the ABC family of television networks, the comic book giant Marvel, an interactive media group, a consumer products division and lots more. So, with all this going for them one would think all these other businesses would contribute more to profits than they do.
Part of the reason ESPN gets such a high valuation is because of the quality and stability of its earnings. With Disney’s other businesses susceptible to lots of risk, ESPN has revenue that is tied to multi-year contracts ensuring a steady revenue stream. Add to that the fact that they deal in a currency that has shown itself to be very low risk and price inelastic, live sports.
As the price of tickets at live sporting events has gone up over the years ESPN viewership has enjoyed a stability and growth that is the envy of many other businesses. While one component of ESPN’s revenue, ad revenue, can be volatile because of ups and downs in the general economy, its the affiliate fees they receive from the cable companies, which have grown at an 8% annual clip, that make ESPN such a steady and reliable contributor to profits.
With its growing lineup, already including the flagship ESPN, plus ESPN2, ESPNU, ESPN Plus, ESPN Classic and the Spanish language ESPN Deportes, this is a company to watch. ESPN has shown it has a great knack for growing with emerging trends, like its increased coverage of mixed martial arts as that sport has grown in popularity. Barring any major negative turnover in their senior management ranks, expect ESPN to continue to be a profit workhorse for Disney for a long time to come.
