Disney Needs To Focus Organically To Improve Consumer Distribution

While changing consumer habits and the proposed merger between AT&T Inc. T and Time Warner Inc TWX are creating strategic challenges for Walt Disney Co DIS, Credit Suisse’s Omar Sheikh believes Disney’s management can rise to these obstacles.

Sheikh maintains an Outperform rating on the company, while lowering the price target from $128 to $125.

Impact Of Merger

The analyst explained that if the AT&T/Time Warner deal is completed, the combined entity would have 3.5x Disney’s EBITDA and 2.6x its free cash flow in 2016, along with over 50 million direct customer relationships in U.S. wireless alone.

“This will confer an enhanced ability to bid for sports rights from 2021 onwards, and thereby put pressure on Disney to invest further in ESPN's direct to consumer distribution capabilities,” Sheikh mentioned.

While this can be achieved either organically or inorganically, the analyst believes the organic route could be meaningfully less expensive, while simultaneously giving Disney the opportunity to customize new services around its own IP.

ESPN

Season-to-date ratings for NFL games on ESPN have declined 19 percent year-on-year, and Sheikh believes the declines make it prudent to be conservative at this point. Therefore, the analyst has reduced the ad growth forecast to 2 percent for 2017.