Media Moats Are On Sale
Overreaction to subscriber losses provides a buying opportunity for some wide-moat names.
Given the recent volatility in media stocks, we are addressing some concerns that may be behind the recent price declines. We believe that research reports on ESPN's subscriber losses and subsequent discussion by management at Walt Disney (DIS) generated an overhang over the sector and downward pressure on all media shares. Given that these subscriber losses were well known and relatively small, we believe the resultant sell-off was overdone and has created a buying opportunity. We prefer wide-moat-rated names such as Disney and Time Warner (TWX), both of which are trading well below our fair value estimates.
In its recent quarterly earnings call, Disney management noted that cable subscribers at ESPN would decline roughly 1% primarily because of cord-cutting in 2016. We note that the company discloses the Nielsen subscriber numbers for its channels in its annual 10-K filing. ESPN reported household subscriber levels of 98 million in 2012, 99 million in 2013, and 97 million in 2014. However, these numbers are lower than the actual number of subscribers that Disney gets paid for by distributors. Given the tremendous hype around cord-cutting and cord-nevers, we see the projected subscriber losses as both relatively low and expected. We also note that competitors such as Time Warner have explicitly included similar subscriber losses in previously issued long-term guidance. ESPN generally receives more than 5% annual increases in its affiliate fee per subscriber as part of its carriage, which significantly outweighs the projected subscriber decline. Given these circumstances, we believe ESPN will remain an important driver of growth at Disney.
Neil Macker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.