Disney ESPN REUTERS/Jacky Naegelen

Some Disney analysts and investors are still concerned about ESPN. ESPN was blamed for Disney stock taking a hit in February despite the “greatest single quarter in company history,” was cited as the main reason why the company missed its second-quarter targets in May, and lost subscribers in the third quarter (although their bottom-line contribution actually improved).

The New York Post’s Richard Morgan reported Tuesday that Drexel Hamilton analyst Tony Wible has downgraded Disney stock, citing the rise in NBA costs that kicks in this year. (The new ESPN/Turner deal signed in 2014 pays the league a combined $2.7 billion annually, up 190 per cent from the old combined $930 million per year.)

However, downgrading Disney over the NBA deal alone wouldn’t make much sense. Those costs may be hitting the bottom line this year, but they’ve been known for years. A Motley Fool article from Rick Munarriz does a better job of explaining Wible’s downgrade (from buy to hold, and from a price target of $112 to $102, which is still over $10 ahead of Disney’s $91.70 at close Tuesday), and notes that Wible makes some good points about concerns for Disney that go beyond ESPN:

It’s been 13 months since shares of Disney hit an all-time high, and at least one analyst thinks that it won’t be revisiting those levels anytime soon. Drexel Hamilton’s Tony Wible downgraded shares of the media giant from buy to hold this morning, and slashed his price target from $112 to $102.

Wible’s concerns aren’t materially different from those of other Wall Street pros that have taken a more cautious stance on Disney these days. The naysayers often point to rising programming costs at ESPN relative to its gradual slide in cable subscribers, and Wible points directly at the escalating costs associated with its NBA contract.

It’s not just Disney’s media networks division that’s giving Wible pause. He is also concerned about the difficult theatrical comps that its movie studio is facing. That’s fair. Star Wars: The Force Awakens release last holiday season will be a hard act to follow. Wible also feels that the costs out of Shanghai — where Disney opened its newest theme park resort in June — will weigh on its bottom line in the new fiscal year that kicks off in a few days. 

Wible concludes that Disney may not be able to justify the market premium it commands relative to its media group peers, especially if market volatility continues to be a problem. Spoiler alert: Market volatility will continue to be a problem.

However, Munarriz notes that there are counters to each of these points. Here’s his counter about ESPN:

There’s merit to the analyst’s concerns, but there are also effective counterpoints for every knock. There’s no arguing that Wible is nailing a pressure point with investors when it comes to ESPN, and his fear that NBA costs are about to more than double — increasing costs there alone by $690 million to $740 million — makes one wonder if it’s better off just emphasizing its news shows, e-sports, or less expensive athletic leagues. However, lost in all of this is that Disney’s still growing here. Its media networks division — Disney’s largest — has seen its revenue and operating profit grow 3% and 2%, respectively, through the first nine months of fiscal 2016. That’s not the kind of heady growth that investors like to see, but at least the small steps are going in the right direction.

Munarriz also mentions that Disney’s movie studios have been incredibly strong and appear poised for further success, that the theme park attendance decline is somewhat countered by ticket price increases, and that while there are justifiable concerns about Disney Shanghai, they actually only own a minority stake in that park. Here’s his overall conclusion (just ahead of a note that Disney’s still on the Motley Fool’s top ten stocks to buy now):

Disney has earned its market premium. It has the hottest movies at the multiplex, and its theme parks are unrivaled in terms of attendance and resulting revenue. ESPN may be running through a rough patch, but it remains the top brand in its niche. Even Wible’s seemingly neutral price target of $102 suggests reasonable upside from this point. Disney’s down, but it’s certainly not out.

ESPN as the top brand in its niche is certainly undisputed (see what we did there?), and it’s worth stating that they have seen some good news lately. They actually saw a subscriber uptick to a Nielsen-estimated 89.856 million in August (although that was part of a seemingly across-the-board increase for cable networks), which doesn’t even include their presence in streaming options like SlingTV and Playstation Vue. Their per-subscriber fee (a massive part of their bottom line) is now over $7 a month.

They were a key part of the media networks division’s positive results in Q3, and Disney’s investment in BAM Tech not only looks like a smart diversification, but one that could play a key role in the success of ESPN’s forthcoming over-the-top offering (a long-hoped-for goal of many analysts that’s getting closer and closer to fruition). Also, while they’ve seen a lot of prominent personalities leave, they no longer have to pay those particular expensive personalities, and their ratings have remained decent even with big exits.

Yes, there are absolutely concerns about ESPN’s future, and rising rights costs and declining subscriber numbers are one of the biggest given the financial impact that can have. Yes, downturns at ESPN have the potential to have a massive impact on Disney’s overall performance, as we saw in Q1 and Q2. Yes, Disney’s current stock price of $91.72 is way below the $118.67 it hit last Nov. 25, and not far above the $88.85 it plummeted to after their subscriber losses were revealed (by the way, that’s still the subject of a potential lawsuit, which could be concerning for Disney.)

Disney may not get back to those $118 per share heights any time soon, and ESPN may be a key reason why. However, when even an analyst’s downgrade is to a neutral rating with a target of $102, and when there are others who think the stock can go higher than that, it’s certainly not all bad news for The Mouse and The Worldwide Leader. (Now that would make a good Disney animated film…)

[The Motley Fool]

About Andrew Bucholtz

Andrew Bucholtz has been covering sports media for Awful Announcing since 2012. He is also a staff writer for The Comeback. His previous work includes time at Yahoo! Sports Canada and Black Press.