Analyst Downgrades Disney Stock on High Expectations, Cord-Cutting Risks

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Richard Greenfield cuts his rating to "neutral," also saying "we and investors are now factoring in dramatically higher and ongoing film success."

BTIG analyst Richard Greenfield on Monday downgraded his rating on the stock of Walt Disney from "buy" to "neutral" despite raising his financial forecasts for fiscal years 2016 and 2017 above Wall Street consensus.

"We believe Disney shares are near full value, based on very robust expectations over the next couple of years, with little margin for error," he wrote in a post entitled "The Force Is Strong but Disney Approaching Full Value."

"We have been enamored with Disney stock for almost five years now," Greenfield explained. "In hindsight, we had no idea what a magical content hot streak was or could be given the past year at Disney, not to mention the film slate over the next couple of years [Star Wars, Avengers, Pirates of the Caribbean, Finding Dory, etc.]." He also concluded: ‎"Disney has clearly proven over the past five years that it can meaningfully outperform earnings expectations."

But the analyst added: "Yet we and investors are now factoring in dramatically higher and ongoing film success, no slowdown/downturn in the theme park attendance or spending globally, with robust consumer products growth driven by the strength of film entertainment. Furthermore, with the cable bundle fraying [increased cord-cutting and new smaller bundles materializing] and television advertising now in secular decline, the risks to Disney’s cable network franchises are not insignificant."

Concluded Greenfield: "Disney is clearly best positioned among its broadcast/cable network peers, with its must-have sports-driven ESPN networks and non-advertising driven Disney Channels. However, we are increasingly struggling with the question of whether anyone in the sector can flourish as consumer behavior shifts away from traditional television viewing, not to mention a complete lack of interest in wasting time on commercials."

As media consumption shifts to digital, the analyst said that "we love that Disney is willing to disrupt itself" but said "we have to imagine other smaller bundles without ESPN will emerge."

Given that Disney has "the most significant fixed cost structure in the industry," he said "if Disney's cable network subscribers fall faster than expected, margins will suffer meaningfully.‎"

While upcoming tentpole film releases are expected to be "huge," Greenfield said that one must "consider what a miss by one of these franchises might look like." He explained: "In addition to lower theatrical contributions, the impact of a less than blockbuster release would have important ramifications to Disney's related consumer products, interactive and possibly theme parks businesses as the franchises are pushed through the Disney machine."

Twitter: @georgszalai