Illustration by Lorenzo Petrantoni
By Ryan Derousseau
November 18, 2015

Over the past year investors have flocked to Disney’s (DIS) shares, anticipating the release of the first Star Wars movie since Lucasfilm joined Mickey’s club. But the stock’s 23% rise in 2015 masks some bigger long-term concerns. In August, Disney lowered its revenue expectations as consumers continued to drop cable at an unexpected rate, leaving 3 million fewer households with access to ESPN, its stalwart sports network. For the first time in years, investors say, the movie business is the main factor driving Disney’s stock. The big question is whether growing revenue from blockbusters can offset losses from the cord-cutting trend.

Headquarters
Burbank, Calif.
Employees
180,000
Revenue (FY 2015)
$52.5 billion
Business
Entertainment, including film and TV production, cable television, theme parks, and consumer products
Market Cap
$196 billion
Share Price
$116 (up 23% YTD)

SHARES ARE PRICEY: Disney’s share price values the company at 20.1 times its expected 2016 earnings, about 12% higher than the ratio for the S&P 500.

BUT PROFITS IMPRESS: Disney’s earnings for fiscal 2015, announced Nov. 5, were a record $4.90 per share, on net income of $8.4 billion.

Invest: Face-Off

BEAR

It’s a great company, but Disney is fully valued. Roughly $9 billion, about half of Disney’s earnings before interest or taxes are factored in, will come from the traditional cable networks, like ESPN and ABC. Those channels face the same threats as their peers, yet Disney is valued 30% higher. Compared with other theme park operators, Walt Disney also trades at a 30% premium. There’s so much capital needed to maintain theme parks, though, that it should be priced at a level lower than its cable networks. That isn’t the case.

This leaves its movie business—which accounts for only 18% of Disney’s earnings—driving the valuation. Cable networks have reliable sales based on subscriptions. Studios need hits and a lot of them for a company Disney’s size. Star Wars will be fantastic. But even if it creates $1.5 billion of profit every year as Disney rolls out six new movies in the series, as planned, that doesn’t justify the premium compared with its peers. The studio business is still small potatoes to ESPN, cable, and the theme parks.

—Brett Harriss, analyst, Gabelli & Co.


BULL

Disney is the most strategically thoughtful and prudent media company when it comes to its intellectual property investments. I think the new Star Wars movie will do north of $2.2 billion from the box office globally. Disney has also inundated the market with Star Wars products in a good way. This will have a big effect, creating a 13% increase in consumer product revenue this year. In an environment where ad dollars aren’t great, it’s important to have this high-value intellectual property, which it also has in Pixar and Marvel.

ESPN is the real concern. You have a channel in nearly all cable subscriptions, and it’s at a high price point. Even if cord cutting increases, ESPN has the most sports content and is a must-have for fans. Plus, it will still have revenue coming from subscriptions for a very long time, with cable cutters growing only between 1% and 2% a year. At [a ratio of 14 times] enterprise value to operating income, we price Disney at a 27% premium to its group and have a target of $130.

—Ben Mogil, managing director of equity research, Stifel Nicolaus


For more on Disney, watch this Fortune video:


A version of this article appears in the December 1, 2015 issue of Fortune with the headline “Will Disney’s Stock Retain Its Magic?”

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