Can Star Wars, “The Force Awakens” overcome the Dark Side of ESPN?

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This blog post is safe to read if you haven’t seen the movie. It doesn’t contain anything that will spoil your future viewing of the actual movie. This post is a follow-up to a post that I wrote back in August. Has Disney Lost Its Magic Touch? | Smart Money

The company first warned of subscriber losses at ESPN back in August and since then other media companies have spoken of concerns that viewers are increasingly opting for online streaming over pay TV. I was surprise by an analyst that came on CNBC last Friday will a bold call on Disney shares.

Walt Disney shares slumped after BTIG analyst Richard Greenfield cuts his rating to “sell” from “neutral”, saying the likely success of the latest Star Wars movie would not be enough to offset the impact of subscriber losses at ESPN.

Disney’ shares fell as much as 3.6 percent to $108.01 on Friday as BTIG became the only brokerage among 33 to rate the stock “sell”. BTIG has a price target of $90 on the stock.

Greenfield said Disney’s cable network’s profitability would meaningfully underperform investor expectations which would eat into operating income in 2017. Cable networks represents about 46 percent of Disney’s total operating income. Greenfield said if the new Star Wars movie did not rake in more than $2 billion in worldwide box office revenue, Disney would miss Wall Street’s profit estimates in 2016 as well!

BTIG thinks “Star Wars Episode VII: The Force Awakens” would help Disney “modestly” top earnings estimates in 2016, but said consensus estimates were “too high” for 2017 and “far too high” for 2018.

Disney’s chief executive, Robert Igar, has said that he could imagine ESPN selling the sports network over streaming video via a so-called over-the-top, or O.T.T., subscription, calling such a move inevitable. However, Greenfield believes that subscribers wouldn’t pay annual fees for ESPN. For example, football fans would only subscribe during football season and then cancel.

As a shareholder in Disney, this bold sell call got me a little worried so I did some more research. I rechecked first call earnings valuation report at T.D. Waterhouse which had 4 strong buys, 13 buys, 12 hold recommendations and no sells.

I watched a Business News Network (BNN) video featuring a special report on companies that will benefit from the success of Star Wars. The CEO of Cineplex which owns 80% of all movie screens in Canada was interviewed. I was surprised to learn that 50% of ticket revenue goes back to Disney.

A toy distributor was also interviewed and he indicated that licensing agreements with Disney required royalty payments of over 10% on all Star Wars merchandise that is sold. Even “Cover Girl” is trying to profit from the Star Wars movie craze. “Star Wars Limited Edition Super Sizer Mascara – The Dark Side”

The CEO of Toys R Us was also on CNBC and stated that all Star Wars merchandise was consolidated into one section of their store to ensure customers would have easy access to all available products.

I also googled upcoming Star Wars movies and list of titles. Besides Episodes VIII & IX, Rogue One: A Star War Story and a Young Had Solo movie are also in the works. Disney’s line up of upcoming films and its merchandising strength appears to be strong enough to reduce any of my fears regarding my faith in the Magic of Disney!

Only time will tell if Richard Greenfield (aka Darth Vader) is right: “If you only knew the power of the Dark Side”

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