Walt Disney Co (NASDAQ:DIS): Is Disney Stock a “Buy” Without ESPN?

Disney StockShould You Invest in Disney Stock (DIS)?

Shares of Walt Disney Co (NYSE:DIS) have been trading at a discount ever since ESPN began losing subscribers. Despite the enormous success of other Disney properties, such as Marvel Studios and Lucasfilm, Disney stock (DIS stock) seems to be stuck on a hamster wheel.

However, this situation can’t last forever. There are only two possibilities of what could happen to ESPN in the near future, and both of them are good for Disney stock.

The first thing Disney could do is make ESPN available as a standalone subscription. On the other hand, CEO Bob Iger could staunch the bleeding by pawning off ESPN to another company.

In either case, there would almost certainly be a sigh of relief breathed by DIS shareholders, many who are worried about the subscriber losses.

The important thing to remember is that both of these paths lead to a higher price for Disney stock. There is simply no way to explain why the most successful content creator of the last decade is trading at 18.86 times earnings. That doesn’t make any sense!

Are investors turning a blind eye to Disney’s cadre of incredible assets? I certainly think so.

Marvel’s Cinematic Universe, Pixar, and most recently Lucasfilm churn out bankable films like no other entity on the planet. Their worst failure is better than most other movie successes.

For instance, Ant-Man was probably Marvel’s weakest movie in recent years, yet it grossed over $500.0 million in ticket sales. Considering that the movie only cost $130.0 million to make, that’s an impressive 400%+ return on investment. (Source: “Box Office: ‘Ant-Man’ Tops $500 Million Worldwide. Can Marvel Be Saved?,” Forbes, October 29, 2015.)

What’s truly impressive is that these results are “normal” for Disney.

But investors aren’t responding with bullishness, largely because of the ESPN problem. So let’s get back to that.

Saving DIS Stock: Surfing the Digital Wave

Everyone thinks they know what is ailing ESPN. They think that online streaming services have convinced people to cancel their cable subscriptions, which, to be fair, is part of the story. But it isn’t the whole story.

Yes, some people are canceling their cable subscriptions because the prices are so much higher than Netflix, Inc. (NASDAQ:NFLX) or Hulu, LLC. But there are other people who stopped tuning in for political reasons (in response to Colin Kaepernick’s protest etc.), or because they are sick and tired of watching advertisements.

ESPN needs to respond to these challenges in the same way that HBO did. HBO makes premium content like Game of Thrones, Veep, and Silicon Valley, but it was losing viewers as well. To staunch the bleeding, HBO built a subscription-based app called “HBO Go.”

You pay a small monthly fee, and you can watch HBO shows on any device. That is the future.

ESPN will catch up with this reality sooner or later, if for no other reason than it has to. More to the point, the new business model would make ESPN loyal to its subscribers—not to its advertisers. That would shape the programming and weed out the politics.

So to summarize: Disney could build an online media platform for ESPN similar to HBO Go. It has proven successful in the past, which suggests it would pacify investor concerns about DIS stock. Without that anchor weighing Disney stock down, the share price would likely skyrocket.

Let’s call that Scenario #1.

Saving DIS Stock: Finding a Buyer

Some analysts might think it’s ridiculous to think that Disney would ever sell ESPN. Those analysts should take a good look around the tech sector. There are more mergers and acquisitions going on than ever before, particularly for media companies.

Just ask AT&T Inc. (NYSE:T) and Time Warner Inc (NYSE:TWX), or Verizon Communications Inc. (NYSE:VZ) and Yahoo! Inc. (NASDAQ:YHOO).

It’s a seller’s market these days, so Disney could put ESPN on the auction block. My guess is it would fetch a pretty penny, and it would send DIS stock shooting through the roof. None of the other divisions—Marvel, Lucasfilm, Pixar—need ESPN in order to thrive.

Heck, net profits increased 12% over the last year, which led to a 17% bump in earnings per share. Yet investors have locked Disney’s P/E ratio at 19, far too low for a company that is delivering impressive growth. The only explanation is ESPN’s subscriber losses.

Investor sentiment could stay locked against DIS stock until the ESPN problem is resolved. One way to do that is to sell ESPN. More and more analysts are catching onto this concept, so keep a look out for it in the coming months.

Not only would it be the quickest way for Disney to boost its share price, but it might also have the highest probability of success. However, the important takeaway is that Disney stock is almost guaranteed to surge, with or without ESPN.