Disney Stock Downgraded Due to "Mounting Pay TV Concerns"

Walt Disney Studios
A still from 'Star Wars: Force Awakens'

Stock performance and sentiment will in the near-term be driven by 'Star Wars: The Force Awakens,' Michael Morris acknowledges, but says "it's hard not to see shares fully reflecting historically high expectations."

Guggenheim Securities analyst Michael Morris on Monday cut his rating on the stock of Walt Disney from "buy" to "neutral," citing "mounting pay TV concerns."

"We believe at their current price, Disney shares fairly reflect the potential near- and long-term upside from strong intellectual property and parks investment cycles, while underappreciating media networks' related challenges," he wrote in a report. "We see Disney as well positioned for a broader OTT offering, though we see any announcement as coming with "turbulence" for shares."

Morris explained: "We are incrementally more concerned about the impact of weaker pay TV subscriber trends than we were when we upgraded shares in April. Notably softer average revenue per user growth across most distributors in the third quarter provides reason for greater concern that 'skinny bundles' will further impact fully distributed networks, including ESPN."

He added: "Weaker than previously projected subscriber trends have driven lower segment [operating profit] performance than we had forecast. While the impact was relatively modest in 2015 (about 1 percent lower than our estimate at our April upgrade, although that did not reflect a 2 percent tailwind related to the 53rd week), we now forecast that gap to widen given our more cautious subscriber outlook."

But what about Star Wars?

"Performance and sentiment at the company’s consumer-driven businesses (studio, parks and consumer products) will be led in the near-term by the performance of Star Wars" thanks to the Dec. 18 release of Star Wars: The Force Awakens, Morris wrote. "We acknowledge the risk of not being involved for what should be one of the highest-grossing film releases in history," Morris acknowledged. "That said, it's hard not to see shares fully reflecting historically high expectations."

The analyst said his model includes a 22 percent premium for Disney to industry peers for the company's media networks business. "By contrast, if media network traded at a peer multiple, we estimate total value would decline by about 14 percent," he said. Morris put a $115 target value on the stock.

"We continue to view Disney as the most unique collection of media assets in our coverage universe and, as such, expect shares to command a sustained premium valuation," he concluded.