Morgan Stanley analyst Benjamin Swinburne reiterated an Overweight rating on Walt Disney Co (NYSE: DIS) with a price target of $105.
Disney announced plans to increase investment in the Disney Parks, Experiences, and Products ("DPEP") segment.
At the same time, its recent Charter Communications, Inc (NASDAQ: CHTR) agreement clarifies the path ahead for ESPN while strategic options are being explored for linear assets.
The analyst sees the Parks & Experiences businesses (75% of FY23 segment operating income) as uniquely attractive in long-term growth potential, scale, and returns, warranting a low double-digit EBITDA multiple.
By implication, at current DIS share prices, Disney's media assets in aggregate are valued at roughly $50 billion, less than 1x sales, or 30% of Netflix Inc's (NASDAQ: NFLX) current enterprise value.
At more than $55 billion in revenue and growing, the current ~6% DMED EBITDA margin has a significant opportunity to expand over time.
The analyst expects Disney to move aggressively to optimize content monetization in the years ahead.
The Charter agreement allows ESPN's highly profitable linear business to continue to benefit from rising affiliate fees while maintaining its high minimum distribution levels for now.
It also appears to contemplate launching ESPN's flagship DTC service by effectively bundling that product with its linear feed for Charter's MVPD customers, albeit at a modestly lower minimum distribution level.
Unconfirmed press reports suggest Disney is considering selling as much as a 30% stake in ESPN at a $25-35 billion valuation, with the assumption that Disney intends to retain 51% of ESPN and control.
If true, these conversations are likely aimed at improving ESPN's content and distribution position as it works towards a DTC launch in 2024 or 2025.
ESPN's product pipeline includes current discussions with other sports broadcasters and streamers to make ESPN the "front door" for sports fans to access live events in what is an increasingly fragmented viewing environment for fans.
Pro forma for a hypothetical scenario where Disney sells its U.S. general entertainment networks and also sells Star India, Swinburne's forward segment EBIT growth outlook would improve by 500bp from 13% to 18% (FY23 to FY26E).
The ABC network supports ESPN's ability to secure premium sports rights and maximize its monetization potential.
Swinburne sees a possible sale of Disney's owned and operated ABC stations as potentially compelling but regards ESPN and the ABC network as increasingly one business.
With Disney and Comcast Corp (NASDAQ: CMCSA) accelerating the put/call date, the analyst expects a conclusion to this process by year-end or early CY24.
He would note that for every $10 billion in value for 100% of Hulu, he sees a roughly 2% reduction in FY24 pro forma EPS (assuming all cash/debt-financed purchases of NBCUniversal's 33% stake).
Swinburne's $65 bear case assumes a roughly $4 bear case FY25E EPS due to a more significant consumer slowdown impacting U.S. Parks and advertising and implies ~20% downside risk.
His $130 bull case assumes continued strength at Parks, and faster improvement in DTC profitability leads to a $6.50 bull case FY25E EPS and offers ~60% upside.
Price Action: DIS shares traded higher by 0.79% at $82.59 on the last check Wednesday.