Why I Sold Disney

I didn’t want to do it. And it makes me a little sad, because Disney is such an amazing company. I doubt anyone imagined the success Disney would have with superhero movies when it bought Marvel out for $4 billion in 2009.

Disney set a record last year with $7 billion in revenue from movies. And all of its recent purchases were on full display. 

There was the first Star Wars movie since Disney bought Lucasfilm for $7 billion. Marvel was represented with Captain America: Civil War and Dr. Strange. Pixar (bought for $7.4 billion) even got in there with Finding Dory and Zootopia. $18.4 billon in acquisitions, and $7 billion in revenue in one year. That’s how you do it.

Disney is killing it at the box office. But I had to tell my Wealth Advisory readers to sell the stock around $110. Because I’m not sure how much better it gets while Disney deals with its ESPN albatross. 

Albatross! Get Your Albatross!

In September of 2016, I told Wealth Daily readers to buy Disney right now. The stock was about $92 at the time. Disney is up around 17% since then. And while some other blue chips — Apple or Bank of America — have done better, 17% is nothing to sneeze at. 

Still, I think it’s time to stand down on Disney. ESPN aside, the company has been firing on all cylinders. Do we want to bet that continues and that ESPN gets magically fixed in the next few months? Or do we want to think that simply maintaining the status quo is the best-case scenario and that a reversal of recent fortune is very much possible?

At this stage of the bull market, I think it makes a lot of sense to be very critical of your investments and take money off the table when there are any questions.

I may regret it later, but we’ve sold several positions at The Wealth Advisory this year, including Boeing (+217%) and Micron Technology (+104%). And it’s because I keep asking one basic question: How much better does this get?

When my answer is anything less than 20%, I sell. 

So now, let me tell you why I think it doesn’t get any better than 20% for Disney over the next year. 

The Media Division — which includes ESPN — accounts for 48% of Disney’s annual revenue. That’s a lot. ESPN is clearly very important for Disney. And it continues to lose subscribers, month after month, year after year. As of this month, May, ESPN subscriber numbers fell 3.8% over the last year. That’s a big number. And it’s worse than most cable TV stations (the median rate is 2.9%). 

ESPN subscriber numbers peaked in 2011, at just over 100 million households. Last year, it was 89.8 million. Today, it’s 86.9 million. And, not coincidentally, operating income at the Media Division was down 3% in the first quarter. 

Quite simply, that’s a bad trend. And it isn’t clear, at least to me, how that trend gets reversed.

Yeah, Disney has started to offer what’s called “over-the-top” subscriptions to ESPN. That’s where you get a one-off subscription to ESPN through Hulu or whatever without paying for a bundled package from Comcast (or whoever your provider is). Over-the-top offerings just began last year, and Disney has 200,000 subs already. But this isn’t going to fix the issue altogether, because the over-the-top programming is not the same as you get with ESPN from your cable company. 

The thing is, it’s not just ESPN. Cable TV subscribers have been falling for years. Comcast doesn’t care. They still have Internet customers. They can and do raise prices consistently to offset falling subscriber numbers. They have Universal. And Comcast is looking at offering mobile phone service. 

Disney doesn’t really have these options. At least where ESPN is concerned, it is stuck on a sinking ship for at least four more years.

4 More Years

When Disney signed a 10-year deal with Comcast in 2012, it looked pretty good. Disney would get $6.50 per sub across all its ESPN properties. But remember, ESPN viewer numbers hit their highs in 2011. It’s been downhill ever since, and that deal isn’t looking so good now. A lot can happen in four years, and not very much of it is good for ESPN and Disney. 

If cable numbers keep falling, Disney revenue keeps falling. The fact that Disney just cleaned house at ESPN and ditched a bunch of high dollar contracts seems to me to be an admission that it expects the negative trend to continue. That puts more pressure on Studio Entertainment (20% of revenue) and Parks and Resorts (18% of revenue) to make up the difference. It’s a tall order. And frankly, it’s an unrealistic one…

It’s simply not fair to expect perfect execution from the companies you invest in. Very good? Sure. Better than average? I hope so. This was the case when I first recommended Disney a couple years ago. Management is absolutely top notch. CEO Bob Iger’s moves on Marvel and Lucasfilm are basically genius. The execution to date there has been flawless. 

But the ESPN thing is different. Disney is dependent on Comcast. And it’s dependent on a viewer base that is changing faster than anyone could see back in 2012. So no matter how brilliant Iger is, his hands are tied. There’s not much he can do but cut costs and plan ahead for when the Comcast deal ends.

I’m betting we’ll get a shot at Disney at considerably lower prices between now and then. 

Until next time,

Briton Ryle

@BritonRyle on Twitter

The Wealth Advisory on Youtube

The Wealth Advisory on Facebook

A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.