A Wall Street pro is cooling on Walt Disney (DIS +2.30%). Guggenheim downgraded shares of the media giant earlier this week, taking its rating down from "buy" to "neutral" on fears that the cable industry is in a world of hurt as folks start to cherry-pick the channels they're watching.
Guggenheim did bump up its price target from $114 to $115, but that's still a slight discount to where the stock finds itself now.
The concerns are warranted. This has been the year of streaming television, and while some of the early players like Sling TV have made ESPN and Disney Channel a major part of the programming slate, giving consumers more choices than just a couple of satellite and cable television providers will ultimately find more homes without ESPN, Disney Channel, or ABC Family. The "skinny bundles" will wind up saving couch potatoes money, but that will obviously come at the expense of the networks and service providers.
There's no denying that we're seeing this happen. Disney has now posted back-to-back quarters of sequential declines in ESPN subscribers. Live sports were supposed to be immune from the cord-cutting revolution, but now it's getting caught in the scissor blades.
Guggenheim's thesis has merit -- especially since media networks made up 44% of Disney's revenue and 53% of its operating profit in fiscal 2015 -- but there certainly seems to be a lot more going right than wrong at the House of Mouse these days. Disney's media networks still saw revenue increase 12% in its fiscal fourth quarter and 10% for all of fiscal 2015. Adjusted earnings soared 35% in its latest quarter, fueled largely by a 27% pop in the operating profit for its media networks subsidiary.
The past isn't so bad, and the future should be even better. Star Wars: The Force Awakens will break box office records next month, and that's the kind of event that will trickle down to its consumer products, interactive software, and theme parks divisions. Pixar's new movie is a week away. Shanghai Disneyland will start greeting guests early next year. The improving economy should result in higher ad rates from marketers.
Fear of the cord-cutting revolution is real, but Disney is better positioned than rival networks to offset the gradual drip of declining subscribers. Guggenheim has every right to cool on the stock, but that right appears to be wrong.
