Disney Earnings: Why the News Won't Be All Bad at ESPN -- Ahead of the Tape

For Walt Disney Co., the bad news at ESPN might turn less so sooner than investors think.

The troubles at the media and entertainment giant's cable property are well-documented: rising costs, declining viewership and the overall cord-cutting trend are at the heart of the problem. About 762,000 subscribers dropped their cable- or satellite-TV service in the first quarter, the industry's worst-ever subscriber losses to start a year and five times higher than the year-earlier period, according to MoffettNathanson.

Those trends directly impact ESPN, which laid off about 100 employees a few weeks ago. That weighs on investors, with Disney's volatile share price still roughly 8% below its all-time high hit in August 2015. Six double-digit percentage swings since, Disney's stock doesn't command the premium valuation relative to the overall market that is customary, which provides investors an opportunity ahead of Tuesday's earnings report.

The numbers reflecting ESPN probably won't be great, but there is hope that they could soon stabilize. Analysts polled by FactSet forecast fiscal second-quarter earnings of $1.41 a share, up 3.7% from a year earlier. Revenue for the period ended in March is expected to have risen 3.4% to $13.4 billion.

ESPN matters so much to investors because it is the most important part of Disney's "media networks" business, which comprises roughly half of the company's operating income and is bigger than its studio and theme-park units.

As traditional cable struggles, Disney has signed onto several low-priced "slim" internet-TV bundles and is working on its own "over-the-top" digital product that is expected to launch later this year. Those deals should help stabilize ESPN's performance. Chief Executive Robert Iger noted late last year that he was "bullish" on ESPN and that it would return to more robust growth. Analysts are even more optimistic.

Operating income in the media-networks segment has declined on a year-over-year basis in four of the past five quarters. It is expected to have fallen again by 4.2% in the recently completed quarter. But analysts forecast a return to growth as soon as this summer. That is earlier than had been expected. As of the end of last year, they had estimated this segment would continue reporting declines through the middle of next year, according to FactSet data.

In a research note published late last month, Morgan Stanley analyst Benjamin Swinburne made the case that ESPN was transforming "from drag to driver." He said ESPN's distribution revenue-growth rate could nearly double over the next four years. That is because roughly one-fourth of ESPN's carriage contracts with cable- and satellite-TV providers are up for renewal over the next 18 months.

Mr. Swinburne is optimistic that ESPN will be able to boost prices it charges pay-TV distributors "above consensus cautious expectations" and that it will benefit in the future from new streaming deals.

As ESPN goes, so goes Disney's stock, a truism in play now more than ever.

Write to Steven Russolillo at steven.russolillo@wsj.com

(END) Dow Jones Newswires

May 08, 2017 16:16 ET (20:16 GMT)