No Longer A Blue Chip? Atlantic Equities Downgrades Disney Amid ESPN Concerns

• The share price of Walt Disney Co DIS has declined 19.85 percent over the past six months, to a low of $92.54 on January 20.
• Atlantic Equities’ Hamilton Faber has downgraded the rating on the company to Neutral, while lowering the price target from $148 to $104.
• Although the stock has historically been considered a “safe haven” in a volatile market, Faber believes that given the various sector structural issues, the stock should not be counted among the blue chip names.

Analyst Hamilton Faber went on to state, “With strong pricing, we believe ESPN profits can remain relatively flat over the next five years but, in the absence of a convincing DTC model, declining subs will lead to significant profit contraction at the unit over the following five years.”

Although robust near term pricing growth is likely to help profits continue to be broadly flat for the next five years, average growth after this time frame is expected at -12 percent, with ESPN moving into the red after that.

“To offset this, the company needs to develop a convincing direct to consumer model and it seems there are five years to do this before ESPN starts to become a drag,” according to the Atlantic Equities report.

The underlying subscriber estimates for ESPN have been modified to assume a 2 percent per year contraction in U.S. pay TV market, from the earlier 1.5 percent. Faber also expects ESPN to continue to lose penetration, declining from 92 percent in 2015 to 85 percent in 2019.

The EPS estimate for 2016 has been slightly lowered from $5.66 to $5.64, while the EPS estimate for 2017 has been reduced from $6.40 to $6.22.