ESPN Is an Albatross For Walt Disney Co (DIS) Stock
Published reports indicate that cable channel ESPN is preparing another round of cuts to its on-air talent, as parent company Walt Disney Co (ticker: DIS) continues to try to right the ship at the popular network. Traditional cable TV viewers have flocked to cheaper alternatives, and Disney is still trying to solve its ESPN problem.
ESPN is expected to cut 40 jobs starting on May 1, including radio hosts, on-air personalities and writers. ESPN has made similar cuts in the past, laying off 300 employees in 2013 and another 300 employees in 2015. However, the next round of layoffs is expected to include familiar on-air talent.
The cost-cutting efforts at ESPN come in response to plummeting ratings and subscriber numbers. For the past two years, ESPN has been losing an average of about 300,000 subscribers per month. From 2011 to 2015, ESPN lost a total of 7 million subscribers. "Today's fans consume content in many different ways and we are in a continuous process of adapting to change and improving what we do. Inevitably that has consequences for how we utilize talent," Disney said in a statement.
For Disney investors, plummeting viewership and rising content costs is a losing formula.
"Given the sizable NBA rights fee step-up for ESPN in the current fiscal year, we are not surprised that ESPN would be offsetting this margin pressure with cost-cutting initiatives," Nomura analyst Anthony DiClemente said in March.
Disney shares dropped 2 percent in February following a mixed fourth-quarter earnings report. Revenue from Disney's media networks unit, which includes ESPN, declined 2 percent from last year. In 2016, Disney's media networks segment accounted for more than $23.6 billion of the company's $55.4 billion in total revenue.
[See: 7 of the Best Stocks to Buy for 2017.]
In addition to its cost-cutting initiative, Disney is also reportedly working on an over-the-top ESPN streaming service. Last year, Disney purchased BAM Tech, which has provided technology for popular streaming services such as Time Warner's ( TWX) HBO Now and World Wrestling Entertainment's ( WWE) WWE Network.
Despite the weakness at ESPN, Wall Street analysts remains bullish on Disney stock.
"Our analysis of Disney's upcoming distributor renewal cycle coupled with increased conviction in new streaming bundles suggests ESPN's distribution revenue growth rate could nearly double from fiscal year 2016 levels by fiscal year 2020, turning ESPN from overhang to earnings driver," Morgan Stanley analyst Benjamin Swinburne says.
[See: 8 Stocks to Buy For a Starter Portfolio.]
Morgan Stanley maintains an "overweight" rating for Disney stock and Nomura maintains a "buy" rating.
More From US News & World Report
