$DIS Fiscal Q1 Earnings Preview

by Dan February 5, 2013 12:02 pm • Commentary

Event: DIS reports their fiscal Q1 earnings tonight after the close, the options market is implying about a 3.7% move vs the 4 qtr avg move of ~2.4% and the 8 qtr avg move of ~4.4%.   In this trailing 8 qtr period, there have been 2 moves btwn 5 & 6%, 2 up and 2 down and one decline of ~9%.

Sentiment:  Wall Street analysts are generally fairly positive on the stock with 22 Buys, 10 Holds and only 1 Sell with an avg 12 month price target of ~$58.  Short interest sits at a tad over 2% of the float.

Options Volumes / Open Interest:  Open interest was skewed much more to puts prior to Jan expiry, but has since evened out, with call to put ratio back up to 0.9.  Call volumes have been more active than puts by a 1.5 to 1 average over the past 20 days.

The largest individual lines of open interest are in Jan14 expiration:  14k of the Jan14 45 Puts, 11k of the Jan14 57.50 calls, & 10k of the Jan14 55 calls.

Price Action / Technicals:  The DIS is basically trading at all-time highs, after breaking out to new highs 2 weeks ago.  The previous high was made in September, around 53.40.  The 1 year chart shows a clear uptrend in place:  

[caption id="attachment_22332" align="alignnone" width="613"]1 year chart of DIS, Courtesy of Bloomberg 1 year chart of DIS, Courtesy of Bloomberg[/caption]

The 200 day moving average has been upward sloping for most of the past year, indicating a strong uptrend.  The stock’s recent breakout above the $53.40 level (which I’ve shown with the red line) has held, as that level has acted as support over the past 2 weeks.  There is no real resistance level with the stock close to all-time highs.  However, the main disruption to the uptrend in the past year was its last earnings report, shown by the gap down to the 200 day ma in early November.

Valuation / Fundamentals:  Though DIS is at all-time highs for its stock price, its valuation multiple is not stretched relative to history.  Here is the chart of its trailing P/E over the past 10 years:

[caption id="attachment_22334" align="alignnone" width="504"]7 year chart of P/E, Courtesy of Bloomberg 7 year chart of P/E, Courtesy of Bloomberg[/caption]

So at 17.5x, it’s near the upper end of the 5 year range, but in the middle of its 7 year range (DIS grew earnings 40% yoy a couple times in the mid-2000’s).  Its projected earnings growth of about 15% over the next 2 years makes 17.5x seem fair to cheap, if DIS can achieve those projections.

Back in Nov when DIS reported disappointing Q4 that was highlighted by lower than expected ad sales and margins in their cable networks, miss in their studio entertainment, but mildly offset by decent performance in theme parks and cruises.

Vol Snapshot:  Implied volatility (red) vs. realized volatility (blue) over the last year has been relatively stable, with both measures fluctuating in a range between 18 and 28:

[caption id="attachment_22333" align="alignnone" width="673"]30 day Implied vs. Realized Volatility, 1 year chart, Courtesy of LiveVolPro 30 day Implied vs. Realized Volatility, 1 year chart, Courtesy of LiveVolPro[/caption]

Implied volatility is at the same level it has been for the past 4 earnings events, close to the 25 level.  In short, implied volatility seems priced fair vs. current realized volatility, and relative to recent history.

My View: While the fiscal cliff debate was a drag on consumer spending in Q4, the payroll tax hike is likely to have a similar effect in Q1.  If last week’s consumer confidence print is any evidence of this, my sense would be that the risk reward of committing new $ to DIS at ALL TIME HIGHs is not particularly great.  There are a lot of moving parts when looking at this company, from studios that can offer a fairly large delta on earnings, to theme parks both here and abroad and of course advertising and cable revenues. I am certainly not a media analyst, but a wait and see approach for directional players could be the way to go, but we are taking a closer look from a vol perspective.