Here's how ESPN can get its mojo back

ESPN has been having a tough time of it.

Disney has been struggling of late due to falling ESPN advertising revenue and 2% annual subscriber erosion at ESPN for the last three years.

Programming costs were also higher toward the end of last year, escalated by the costs of Olympics programming, rights to air the World Cup of Hockey, and higher rates for college sports.

And like other networks, ESPN is struggling with a consumer shift towards cheaper streaming services like Amazon and Netflix and away from cable and satellite bundles. The number of households with the sports network has declined since 2013.

All of this could be about to change however, according to a note published by Morgan Stanley on Monday.

Morgan Stanley equity analysts, led by Benjamin Swinburne, upgraded Disney from an equal-weight to an overweight rating. The team cited a reset of estimates and potential for ESPN to accelerate revenue growth against a more aggressively managed cost base. The team also believe that distribution renewals for ESPN, new streaming bundles, and a strong film slate will accelerate Disney’s EPS growth in 2017.

“It remains a time of transition at Disney, as it evolves its ESPN/ABC distribution model to attempt to reach consumers that have been opting out of the pay-TV bundle,” according to the team. They expect ESPN to launch an à la carte service, like CBS and HBO have. “We expect the à la carte and bundled offerings will co-exist for a long time, creating more earnings stability than the market presumes.”

Morgan Stanley also note that new initiatives across Disney’s domestic and international parks like the recently opened park in Shanghai could drive significant return on investment and lift earnings power.

It’s also likely that Disney will bring on a new CEO after June 2018, succeeding Bob Iger.

Disney is ticking up 0.47% to $109.81 per share on Monday afternoon. Morgan Stanley increased their price target for the company from $101 to $124 on Monday.

Disney reports Q1 F17 earnings results on February 7th.

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