The 1995-96 Chicago Bulls won a record 72 games during their 82-game season, completely dominating their league. As an investor, I'm searching for companies that own their markets as thoroughly as the Bulls conquered the NBA. In the business world, Disney (NYSE:DIS) subsidiary ESPN might just be a valid parallel to that mighty Michael Jordan-led dynasty.
ESPN and sports television are practically synonymous -- just try to think of any serious competitors. Sure, we can all occasionally catch a game on any of the major TV networks or regional channels. But nationwide, ESPN clearly leads the pack in this particular area by a wide margin.
Niche dominance = pricing power
As our viewing habits continue to shift from network television to cable and the Internet, ESPN is in a position to nail down its already secure lead in the market. Furthermore, because its product -- high-quality sports news and event coverage -- is a hot commodity in so many homes and hotel rooms across the country, it's likely ESPN will continue to cash in on the premium prices it charges cable and satellite operators such as Comcast (NASDAQ:CMCSA) and DIRECTV (NASDAQ:DTV). It's estimated that ESPN charges more than eight times more per subscriber than News Corporation's (NASDAQ:NWSA) Fox News Channel or Time Warner's (NYSE:TWX) CNN.
Size matters
Businesses of ESPN's caliber are rare, but not impossible to find. Unfortunately, they're often either privately owned, or one tiny slice of a large conglomerate. Gillette razors and Duracell batteries might be wonderful business lines, but because parent Procter & Gamble (NYSE:PG) is so large, neither is likely to have a substantial impact on its stock price.
Diving into the numbers
But despite its status as a citizen of the Magic Kingdom, ESPN contributes about one-third of Disney's consolidated earnings before interest and taxes (EBIT). Management doesn't break this out for us, but I'd further estimate that ESPN provides about one quarter of Disney's bottom line. Since the House of Mouse's total 2008 net income was $4.4 billion, Disney's 80% stake in ESPN should have thus generated roughly $1 billion in 2008 net income. If we apply a P/E multiple of 20, which I figure is fair for a business with such dominance and pricing power, ESPN alone is worth $20 billion.
A little more math: 42-20 = 6.5
Today, you can buy all of Disney for about $42 billion. After subtracting the $20 billion we calculated as the value of ESPN, the price for the remaining businesses, including Mickey Mouse and a 1,000-acre private island in the Bahamas, is $22 billion, or about 6.5 times 2008 earnings. Is it any wonder that Disney has been snapping up its own shares?
So the next time you're watching ESPN the channel on a brisk Saturday morning in September, clutching a beer and reaching for those crunchy munchies, take a moment to notice ESPN the business. And enjoy the game.
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