Introduction
Analysts spend a lot of time covering things like Disney (DIS, Financial) Parks and Studios but ESPN is the treasure chest of the company. Acquiring ABC/ESPN was one of the smartest things DIS has done in its storied history.
Details
Looking at segment operating income from the last 10 years helps to put things in perspective. ESPN is more than half of the gigantic Cable Networks number in blue.
The enormous Cable Networks segment in blue is over half ESPN. There are some quotes in ESPN The Company by Anthony Smith that explain the magnitude of ESPN’s operating income. 2007 is itemized in the introduction:
The consensus view of Wall Street analysts, however, is that the combined revenues of the ESPN enterprise, conservatively speaking, totaled roughly $5 billion in 2007, with profits in the range of $2 billion.
[ESPN The Company Introduction page xv]
2008 is itemized as well:
ESPN contributed an astounding 33 percent to Disney's total operating income in 2008.
[ESPN The Company pages 18 to 19]
Disney’s 2007 10-K tell us that 2007 Cable Networks operating income was $3.6 billion. If Smith is correct and ESPN by itself was around $2 billion then it was over half of the Cable Networks total.
We can see that ESPN was more than half of the Cable Networks total in 2008 as well. The 10-K has the total operating income at $8.5 billion and 33 percent of this is $2.8 billion. The Cable Networks segment was $4.1 billion so once again ESPN was over half of the largest segment.
If ESPN was over half of Cable Networks again in 2014 then it means that ESPN had operating income of more than $3.2 billion. In fact, some say it could be significantly higher. Kurt Badenhausen from Forbes recognized the importance of ESPN's cash flow in his April article:
ESPN’s value is derived from the massive cash flow the company generates, which is expected to reach $4.5 billion this year, up 39% from five years ago.
ESPN provides cash for studio acquisitions like Pixar, Marvel and Lucasfilm. The studio segment is less reliable than other segments when it comes to consistent operating income. However, the studio segment provides a steady stream of characters for the park and consumer segments. It has all been working nicely the last 10 years thanks to the steady stream of cash from ESPN.
Closing Thoughts
People have worried about content providers like ESPN over the last 10 years as customers pull the plug on cable. At the time of this writing ESPN is still growing and the naysayers have been wrong. People think of DIS as a studio/park company but the reality is that ESPN brings in key operating income.
Sources:
Disney 10-K Filings from 2014, 2011, 2008 and 2005
ESPN The Company by Anthony Smith copyright 2009
The Value of ESPN Surpasses $50 Billion by Kurt Badenhausen 4/29/2014 Forbes
Disclaimer: I am long DIS. Any material in this article should not be relied on as a formal investment recommendation.
