DIS Fiscal Q3 Preview, Plus Protection for Long Holders

by Dan August 7, 2012 1:04 pm • Commentary

Event: DIS reports fiscal Q3 earnings tonight after the close tonight.  The options market is implying about a 4% move, vs the 4 & 8 qtr avg moves of about 4.25%.

Sentiment: Wall Street analysts are generally positive on the stock with 21 Buys, 10 Holds and only 1 Sell, with an avg 12 month price target of about $51.  As the stock makes new all time highs, short interest has ticked up to about 3% of the float.

Price Action:  Stock is up a whopping 33% ytd, and up 76% from the intra-day Oct 2011 lows seemingly making new 52 week highs everyday.

Techncials: Chart is clearly in a massive uptrend channel since the Oct Lows making a consistent series of higher lows and higher highs, but it is not immune to taking short term healthy pauses (since Oct there are about 8 sell offs in the magnitude of 4% to 8%, from what was at the time a new high).

1 Yr DIS chart from Bloomberg


Fundamentals: With most of DIS’s media peer’s June quarters reported in the last couple weeks, investors have had a free look at advertising, tv and movie trends, and to be fair it is hard to pick too many holes in the results of most (TWX, NWSA, VIAB), as all trading at or near 52 week highs.  DIS go about 20% of sales last year from advertising, but with properties like ESPN performing as well as they are, with such seasonal tailwinds with Euro Soccer Championships and the Olympics, I would expect them not to be on the one to disappoint.  Also with crude oil down significantly in Q2, lower prices at the pump could have helped theme park attendance.   Stock trades at about a market multiple and equal to it’s expected earnings growth next year. DIS gets about 25% of their revenues from overseas so we could see some slight currency headwinds, which could be the weakest component of their forward guidance.

Earnings Expectations:

Q3:  EPS=.93, Revs=11.3b

Q4: EPS=.71, Revs=11.08b

2012:  EPS= 3.02, Revs= 42.78b

MY VIEW:  Given DIS’s peer’s results, guidance and the stock’s price action, I would be fairly surprised if we saw any big surprises.  I think it is fair to say that DIS is likely more diversified than many of it’s peers and should see near term support from the company’s large share repurchase program and any hope of the company boosting their dividend that yields a paltry 1.2%.

We looked long and hard for something to do here, but it is tough, while vol is elevated into earnings as expected, it isn’t exactly expensive, and with $5 wide strikes above $50 and dollar strikes below $50 it is impossible to make a bullish bet without buying a call that is about 10% out of the money,and if u wanted to spread or overwrite the out of the money calls are just to dollar cheap.  On the downside it looks a bit easier with dollar strikes, and obviously I would be more inclined to make a defined risk bearish bet in a stock like this, but in a market like this, it seems to be a futile endeavor.

For the time being, it appears that investors are no longer worried about a global economic slowdown, which is ridiculous in my opinion, it appears that Chinese investors feel a bit differently with the Shanghai Composite less than 3.5% from the multi-year lows……Something has to give btwn emerging market indices like Shanghai (down 2% ytd)and Brazil’s Bovespa (up 3% ytd) and the SPX up 12% and the DAX up 18%.  Either EM is a buy, or developed a sale.

But in the meantime, of course we think longs should be prudent.


DIS ($49.90) Aug 50 / Jan13 55 Collar for .20 debit

IF I WERE LONG, and worried about near term weakness, but don’t want to sell my stock, I would   sell the Jan13 55 call (stock ref $49.90) at .85 and use the proceeds to buy the Aug 50 Put for 1.05,  Basically collaring my stock.  If the stock sold off I have protection basically below 49.80 (the difference btwn the .85 credit of the call sale and the 1.05 purchase of the Put.   But here is the thing, as the call is in Jan there is a lot of time value in the option, and it should be considered an overwrite, meaning you are willing to sell you stock at $55 on Jan expiration, or in the meantime, have profits in your long position capped.  You would only do this is if you wanted to protect gains btwn now and Sept expiration and willing to give up some future upside to help finance the protection.

At Aug expiration if the stock is higher than $50 then the Put expires worthless and you are long stock, short call, essentially a buywrite with gains capped at $55 (less .20 premium you paid.)  At that point if the stock is below $55 the call you sold at 1.05 is likely to be worth a bit less than 1.05 (depeding where the stock is, if it is at $51 will be considerably less) and you can just cover the call.


Stock Replacement

As I mentioned in the “Word” this morning, stock replacement strategies could make sense with volatility in most sectors coming down dramatically of late.  Over the last 30, 60, and 90 days, DIS realized vol has been btwn 18 and 19.  The OCT 50 call, is offered at about 19 vol or $1.74, which implies a break-even level of about 3.5% higher.  That is not exactly a slam dunk, but again, it is not exactly an expensive option in vol terms on a relative basis, and you want to define your risk, you could sell your long stock, and own a longer dated call with an eye towards spreading on any rally.



Bloomberg Preview:

* Bloomberg Industries analyst Paul Sweeney:
* Ad Trends: Color on what peers have called sluggish 3Q scatter due in part to the Olympics
* Cars Land: Early feedback on recently opened attraction in Anaheim
* Theme Parks: Impact of continued global economic weakness on global theme parks; results from recent quarters have been quite strong despite headwinds
* Interactive Media: Update on Bob Iger’s stated goal of unit profitability in 2013
* Wunderlich Securities says WatchESPN, similar apps should help benefit ad sales; sees easy studio comps
* Caris sees continued contribution from cruise line; studio, consumer products outperformance on Avengers; expects comment on toy/licensing rights to Spider-Man, Thor, Iron Man and The Incredible Hulk products
* Stifel sees some deceleration in Media on lower recognition of deferred affiliate rev. on new deal with Comcast

* DIS reports post-mkt, last 4 times 4:14pm-4:15pm
* Conf call 5pm 866-314-9013 pw 42884768