Disney on Ice: Earnings Play

by Dan May 10, 2011 11:54 am • Commentary

DIS report tonight after the close, the implied move is ~3.3% vs the average move over the last 4 qtrs of about 3.75%…

-stock is up 16% ytd and 42% from it’s 52 week lows.

-analyst community generally positive on the name with 18 Buys, 11 holds and no Sells.


-Deutsche Bank in their preview note of the DIS qtr suggested that in light of  “an estimated $15m impact from the Japan park shut-down and an estimated $50m write-down for Mars Needs Moms……..it is not clear Disney can beat by as much as they have the past few qtrs ($0.10 ahead of F1Q11, $0.04 ahead of F4Q10, and $0.05 ahead of F3Q10).

-CMCSA’s commentary last week regarding Universal Orlando’s strong performance should be good read across for DIS despite high gas prices, while Thor‘s solid weekend release and upcoming slate of expected summer hits Cars 2, Pirates of Caribbean and Captain America could drive upside.

MY VIEW: Disney is obviously one of the most economically sensitive consumer stocks and one that faces specific challenges when gasoline prices are high as they are now heading into the summer driving season.  But when you consider the market’s propensity to push higher and the performance of some of its peers I am hard pressed to see too disappointing of guidance out of these guys.

-Technically the stock looks poised to break out of 3 month range that it broke following their last earnings report in February.  The trend-line off the Aug 2010 lows should hold barring some very downbeat guidance.

[caption id="attachment_1644" align="aligncenter" width="300" caption="DIS 1 Yr Chart Provided by Bloomberg"][/caption]

TRADE:  DIS (43.50)- Sell the May 42 Put to Buy the May 44/45 Call Spread for Even

-Sell May 42 Put at .30

-Buy May 44 Call for .60 and

-Sell May 45 Call at .30

Break-Evens on May Expiration:

Uspide: stock bwtn 44 and 45 can make up to 1.00, above 45 make full 1.00

Downside: btwn 44 and 42 no loses, below 42 (down ~3.5%) you are Put the stock and lose money.

TRADE RATIONALE: options are expensive heading into the print so I want to look for a way to lessen the premium outlay for a straight vertical spread.   I chose the 42 strike put as it sits right on the uptrend line and is in line with the implied move.  By paying nothing for the structure I have obviously increased my odds of success, but added considerable risk by selling the Put naked…..If this does not fit your risk profile you could sell the May 42/41 put spread and cap your risk, or avoid the Puts all together but recognize that it changes your odds of making money…..