Will Disney's (DIS) Stock Recover On Strategic Efforts?

Investor concerns regarding ESPN’s future, lower-than-expected top-line and rating decline at youth-focused Disney Channel are hurting the media behemoth, The Walt Disney Company (NYSE:DIS) . The company’s shares have declined 11.5% in the past six months, marginally wider that the industry’s decline of 11.1%. Recently, the stock further came under pressure after CEO cautioned that fiscal 2017 earnings are likely to be similar to last year.

What’s Hurting the Stock?

Over the last few quarters, Disney’s ESPN has been closely monitored by investors because of its performance. Identical to performances in the past few quarters, ESPN disappointed investors in the third-quarter fiscal 2017 again. Falling subscriber base and higher programming costs at ESPN were the major concerns this quarter too. Most media companies are failing to cope with "cord cutting" as consumers are unwilling to pay for large bundles of channels.

Fresh NBA agreement and increase in contractual rate for NFL programming drove the overall programming cost higher for ESPN. The company expects programming costs to increase 8% year over year due to $600 million in incremental costs linked with the first year of the company’s fresh NBA contract. Out of $600 million expenses, $400 million incurred in the third quarter.

Disney’s top line has missed the Zacks Consensus Estimate in four straight quarters. In third-quarter fiscal 2017, revenues came in at $14,238 million, almost flat year over year but missed the consensus mark of $14,442 million on account of higher programming costs at ESPN as this is the first year of fresh NBA contract and sharp decline in Studios Entertainment revenues.

With its huge international presence, Disney remains prone to unfavorable foreign currency translations which may have an adverse impact on its top and bottom-line results. Management had earlier cautioned that lack of hedges at favorable rates against forex volatility will squeeze out $175 million from its fiscal 2017 operating income.

Can the Stock Bounce Back?

Disney is striving to bring back ESPN’s golden days. In an effort to attract online viewers, the company has inked a deal with video streaming, data analytics as well as commerce management company BAMTech. Disney which had earlier acquired 33% stake in BAMTech announced its intention to acquire another 42% stake in the firm. Per the agreement, the company will have to shell out $1.58 billion to buy another 42% stake in BAMTech. The company stated that it will use BAMTech to create an ESPN-branded, over-the-top video streaming service that will cover a variety of sports. Disney is striving to make its content accessible to more customers.

Recently, the company stated that it will terminate distribution agreement with Netflix (NASDAQ:NFLX) for subscription streaming of the new movies starting in 2019. Instead, the company will have its own streaming services — one for Disney and Pixar brands and another for ESPN followers. Disney will start online streaming services for ESPN sports in early 2018 and its branded direct-to-consumer streaming service in 2019 will air Disney movies as well as TV shows. The ESPN-branded multi-sport streaming service will give an option to enjoy 10,000 live international, national and regional games every year. Tournaments like Major League Baseball, National Hockey League, Major League Soccer, Grand Slam tennis, and college sports will be live streamed.

Meanwhile, through the fresh Disney-branded service subscribers can view both Disney’s and Pixar’s latest live action and animated movies, starting with the 2019 theatrical slate. Movies like Toy Story 4, the sequel to Frozen and The Lion King will also be streamed. This step gives an indication that Disney is confident about distributing content itself without relying on Netflix or any other companies.

We believe these efforts along with tremendous performance of parks & resorts business and movie business can help the stock bounce back in the near future.

Given the above factors, Disney, which shares space with Twenty-First Century Fox, Inc. (NASDAQ:FOXA) , Time Warner Inc. (NYSE:TWX) and Comcast Corporation (NASDAQ:CMCSA) , carries a Zacks Rank #3 (Hold) at the moment. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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