ESPN, Box Office Could Weigh On Disney

Walt Disney Co DIS was downgraded in a Barclays note Friday morning from Equal-Weight to Underweight on concerns of valuation compression. Analyst Kannan Venkateshwar said the risk for Disney earnings next year hinges on ESPN changing to a fractured media environment and box office success.

Venkateshwar noted that ESPN's business model is dependent on the pay TV bundle cross subsidy. Given ESPN's fixed cross structure and variable revenue, the impact of ESPN's model is significantly affected by subscriber losses, according to Venkateshwar.

While not detailed in his note, many popular figures with big followings, such as Bill Simmons, Colin Cowherd, and Keith Olbermann have been let go by ESPN in the past year.

The second concern in the valuation of Disney lies with its studio business. Venkateshwar said the theory that franchie acquisitions provide a way to alleviate risk to the model is a questionable assumption. Despite the staple franchises of Pixar, Lucas Films and Marvel, Venkateshwar noted that the past eight years have seen little growth in the business outside of "Frozen."

Accounting for the potential management transition in the next two years, coupled with the factors above, Venkateshwar believes that Disney is likely to trade in-line with its peers. Therefore, Venkateshwar cut Disney's price target from $98 to $89.