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Barclays Downgrades Walt Disney Co. Stock - Broadcasting & Cable

Barclays Downgrades Walt Disney Co. Stock

Analyst sees pressure on ESPN, post-Star Wars box office
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Investment company Barclays has downgraded Walt Disney Co. stock, citing subscriber losses at ESPN and the difficulty in growing movie earnings after the blockbusters Frozen and Star Wars.

Analyst Kannan Venkateshwar noted that Disney has historically traded at a premium to the rest of the media and entertainment industry because of the strength of ESPN and its franchise studio acquisitions.

Now, however, he says ESPN is particularly exposed in a fragmenting media environment. "Given ESPN's fixed cost structure and variable revenue model, subscriber losses are likely to have a disproportionate impact on the business model,” Venkateshwar said in a report Friday.

As for the movie business, he says that “although Disney has strong franchises in Marvel, Lucas Films, and Pixar, we note that over the past 8 years, the company's studio and merchandizing revenue has had little growth, especially adjusted for Frozen.”

At this point, even though Disney’s stock prices have fallen 12% since Star Wars was released, the company still trades at a 5% to 16% premium to other media and entertainment companies.

"With major catalysts behind the company, increasing pressure on the single most important cash flow source (ESPN), 3.3x EBITDA in off balance sheet liabilities, potential management transition in the next two years, we believe Disney is likely to trade at best in line with its peers,” Venkateshwar said. “Based on this, using an overall multiple of 9.5x, we arrive at a new price target of $89, from $98, and downgrade the stock to Underweight.”

Disney stock was down nearly 4% in late morning trading amid a broad market selloff trigger by declining oil prices.

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