Shares of Disney (NYSE: DIS) are trading below $100, yet again. The stock appears to be having serious issues with breaking through its all-time high of around $122 a share.
This comes as Disney has a real problem on its hands. DIS has traded up to $120 per share twice in the past six months. Both times it quickly tumbled to below $100, due to worries about growth challenges for cable channel ESPN.
The stock is now off close to 20% in just the last three months after a damning earnings report. The big question has become: what could help Disney finally break through the $120 level in 2016?
The short answer is a break-up.
That's right, breaking up the House of Mouse might be the answer. But even if we don't see a breakup, investors should take a closer look at Disney.
Does ESPN Need To Go? The obvious answer is to get rid of the problem child. Right now, Disney's biggest issue is ESPN. The media industry is troubled, to say the least. Time Warner (NYSE: TWX) has tried to buy 21st Century Fox (Nasdaq: FOXA), and an activist investor is pushing for change at Viacom (Nasdaq: VIAB).
At the core of all this are cord-cutters, which are households that are canceling their cable service. This is putting downward pressure on the companies that operate cable channels. The increase in cord-cutters may eventually pressure cable networks to offer more skinny bundles, which could exclude ESPN as a basic channel.
Right now, ESPN is able to generate the highest affiliate fees per subscriber among all cable channels. And with good reason -- the cable channel offers marketers a reliable outlet to males between 18 and 50 years old, a very valuable marketing demographic. So how does EPSN keep its relationship with marketers while heading off the decline in cable subscribers?
One option is to offer ESPN as a standalone service -- taking the channel directly to consumers. That's something that Time Warner started doing with HBO, in hopes of helping hedge the shift away from conventional cable. It could also offer EPSN as a streaming service with other cable networks, such as ABC. All of this could eventually lead to a spinoff of EPSN or the entire media network business. Right now, Disney has said it isn't considering it, but notes that ESPN could make a good fit for steaming down the road.
So for the time being, the key for investors is that there are still bright spots at Disney beyond ESPN, which includes its parks and resorts business. The opening of its Disneyland Shanghai resort this summer should be a key catalyst for the business. That leads me to another potential catalyst for Disney.
A Major Spinoff In The Future? There is another option, which includes spinning off its parks and resorts business. There are already a couple of independent theme park companies, namely Six Flags (NYSE: SIX) and Cedar Fair (NYSE: FUN).
The theme park business is capital intense and more cyclical than Disney's other business lines. So without the parks segment, Disney would likely trade at even higher valuation multiples. Plus, Disney's theme park margins are running subpar to its peers. As a separate company, management would be able to focus on boosting park margins without having to worry about the other departments.
This business would be relatively easy to separate from the rest of the company, although it would lose a lot of synergies. Right now, Disney is able to cross-sell merchandise and align films with the theme park experience, but as separate entities, this process wouldn't be as flawless.
The case can be made that the parks and resorts business should remain with Disney, at least for now. This comes as the Star Wars franchise is proving to be a huge success, and there's strong merchandising capabilities and cross-selling opportunities with the resorts.
Positive Results In Other Parts Of The Business Overall, Disney posted strong fiscal first quarter results last month, however, ESPN fears overshadowed many positives. Company-wide revenue was up 14% for the quarter, versus the same quarter last year. Star Wars helped lead the way here, where studio entertainment revenues were up 46%. The next Star Wars film, "Rogue One", is set to launch in December this year.
Disney also has Marvel Entertainment, investments in Hulu, deals with Vice Media, an agreement with Alibaba (NYSE: BABA) to bring DisneyLife to China, and deal with Tencent, China's largest Internet service portal, to cover sports in China.
Circling back around to ESPN, things might be getting blown out of proportion there. Its domestic ESPN subscribers did fall in the first quarter of 2016, but the rate of decline of 2% was below the full-year 2015 decline of 3%. And advertising revenues for ESPN were up in the first quarter. The company as a whole is still growing nicely, with a portfolio of assets that are virtually irreplaceable.
Risks To Consider - Disney is still heavily tied to the media industry, which appears to be going through a multi-year transition. Figuring out how to best create shareholder value could be tricky, which includes addressing the slowdown in ESPN.
Action To Take: Disney shares are still very enticing despite the uncertainty. The ESPN fears appear to be overblown for the time being. Shares are now trading at 17 times next year's earnings estimates, which is the lowest level in over a year. And the stock offers a 1.4% dividend yield.
