Walt Disney Co. shares dropped 4% in premarket trade after analysts at Barclays downgraded the stock to underweight from equal weight. Analyst Kannan Venkateshwar wrote in the note that while Star Wars will offer some tailwinds long term, “the likelihood of valuation compression combined with potential risk to earnings next year both on account of ESPN is likely to result in Disney underperforming the sector.” Whereas Disney has historically traded at a premium compared with the rest of the media sector thanks, in large part, to unwavering demand for ESPN. Venkateshwar, like other media analysts, thinks ESPN is most exposed in today’s fragmenting media environment. “ESPN accounts for a disproportionate share of Disney’s cash flow and the gap between [operating cash flow], 7%, and EBIT growth, 17%, over the last two years likely already points to this pressure from subscriber losses. In November, Disney revealed that ESPN has been losing subscribers by the millions. While investors are often enthusiastic about Disney’s film studio due to its Marvel, Lucas Films and Pixar properties, Venkateshwar notes that over the past eight years, Disney’s studio and merchandising revenue has seen little growth, especially when adjusted for “Frozen.” Disney shares rose 11.5% over the course of last year, but have fallen 5.7% so far in 2016.
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