Event: DIS reports its fiscal Q4 earnings today after the close. The options market is implying about a 2.5% one day move, which is slightly above the 4 qtr avg of about 2% and the 8 qtr avg of about 2.25%.
Sentiment: Wall Street analysts are quite positive on the stock, with 22 buys, 12 holds, and only 1 sell, and an average 12 month price target of around $74. Short interest is at 2.2% of float, and DIS is one of the best performing mega-cap stocks in 2013, up more than 38% so far this year.
Options Open Interest: Open interest is heavily skewed towards calls, at around 1.4 to 1 calls vs. puts. The past 1 month volume has been similarly skewed towards calls, at a ratio of about 1.8 to 1. The 70 call line has the most open interest compared to all the other strikes in Nov15th, Dec, and Jan14 expiry. In Jan15, the 75/80 call spread has almost 30k of open interest.
Price Action / Technicals: Disney’s ascent over the past 2 years has been one of the best periods in this storied company’s history. The stock rallied from below $30 in October 2011 to almost $70 in October 2013, a nearly 150% in just 2 years. In the process, the stock broke out to an all-time high and never looked back:
In the shorter-term, DIS stock has essentially stalled since May, though its recent move to a new high is a reason for optimism:
The high in May around $68 acted as resistance on 3 subsequent moves higher, but has acted as support ever since the stock broke above it in mid-October. That’s the obvious support level on the downside, with no real resistance given that the stock is at its all-time high.
Volatility: DIS is a low volatility stock, and has rarely moved more than 2% on earnings over the past 2 years (only 2 instances out of 8). As a result, implied volatility is relatively low despite the event:
Implied vol is likely to fall back into the high teens after the event, so short volatility structures do not have much juice compared to higher volatility stocks.
Our View: DIS has grown earnings between 13 and 21% over the past 4 years, though the bulk of the stock’s gains have come in the past 2. However, the appreciation in DIS stock has outpaced earnings growth, and the trailing 12 month P/E is now around 7 year highs:
Having said that, DIS is still expected to grow earnings at a 15-20% annual rate over the next 2 years, much better than most other large cap stocks that are valued at around 20x earnings.
The technicals highlight the importance of the $68 level. If the stock can stay above there after earnings, it sets up a nice base for the stock’s next launch higher. If the stock falls back below there, the chart will look like an ugly failed breakout, with poor near-term technical prospects as a result. We don’t plan to get involved given the lack of conviction and no appealing volatility anomalies.