Event: DIS reports its fiscal Q3 earnings tomorrow after the close. The options market is implying about a 2.75% one day move, which is above both the 4 quarter average of 2.5% and the 8 quarter average of 2.25%
Sentiment: Wall Street analysts are positive on DIS, with 26 buys, 13 holds and no sells, though the average 12 month price target of $91 is less than 5% above the stock’s current level. A major reason for that is that DIS is already up 13% year-to-date, one of the strongest mega cap stocks in 2014. Short interest at around 2.5% of the float has hardly changed in the past 2 years.
Options Open Interest: Total open interest in DIS favors calls over puts by a ratio of 1.5 to 1. The average volume over the past month has been even more heavily skewed towards calls over puts, by a ratio of about 1.9 to 1. The skewed interest towards calls over puts in DIS is natural given the very steady uptrend in the stock since mid-2011.
The Apr15 100 calls have the most open interest of any strike, at 51k, We detailed that trade on June 5th:
There was a pretty massive roll in calls up and out – one trader sells 25k of the Jan15 80 calls at 7.60 to close, and buys 50k Apr15 100 calls for 1.53 to open.
The Jan15 80 calls also have over 35k of open interest.
Price Action/Technicals: The unbroken uptrend in DIS is truly a sight to behold, especially since the stock has tripled since its October 2011 low:
[caption id="attachment_43758" align="alignnone" width="600"]
DIS daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg[/caption]
DIS has held above its 200 day moving average since late 2012, and the 200 day ma has been upward sloping throughout the past 2years. Even the shorter-term 50 day ma has been upward sloping for the vast majority of the uptrend, an indication of just how steady the gains have been.
The rising 50 day moving average is now around $85, and the 200 day ma is around $78. The stock is very close to a new all-time high, which was set at $87.63 on July 16th.
Fundamentals / Valuation: DIS has delivered consistent results since 2009, achieving EPS growth of 15-25% on sales growth of 5-10% over the past 4 years. DIS is now a $150 billion market capitalization company, and maintaining those levels of growth might become a bit more difficult. Dan touched on the elevated valuation after several years of multiple expansion in a NTT post in mid-July:
Some large media stocks like Disney (DIS) also fit the bill. Disney sports an almost $150 billion market cap and is trading at 22x this year’s and 18.5x next year’s expected earnings. Earnings next year are expected to grow at only 10% with sales growth of 6%. Current PE sits at a 7 year high:
Analysts and investors have justified the premium valuation in large part due to the success and large moat of ESPN, which is an unparalleled media franchise in the U.S. The latest note from GS research is an example of analysts continually raising valuation metrics to keep up with the rising stock price:
We increase our 12-month target price to $89 ($86 prior) reflecting 18.0x our revised CY15E EPS of $4.95 ($4.78 prior). Our 18x CY15 target multiple is at a premium to the 17x average CY15 multiple for our large-cap media coverage. We believe that the premium is justified given Disney’s strong asset portfolio including ESPN, ABC, key franchises including Marvel’s Avengers, Star Wars Episode 7, and Frozen, and its best- in-class Parks business.
One big advantage for DIS is the diversity of its business portfolio. That helps to offset the individual ups and downs in its businesses, and maintain the consistent growth that investors crave. The main risk remains the valuation.
Volatility: Given the consistency of the DIS uptrend, even with last week’s broader market selloff, it is little surprise that options traders have priced in lower volatility ahead of tomorrow’s earnings event compared to most of the past 2 years:
[caption id="attachment_43767" align="alignnone" width="600"]
DIS 30 day implied volatility, Courtesy of Bloomberg[/caption]
30 day implied volatility is likely to fall back to near a 2 year low in the mid-teens after the event.
Our View: Disney’s situation has little that stands out. The fundamental story is impressive and growth remains on track, but valuation is expensive. The technicals suggest a very strong uptrend, but one that is already long in tooth. The volatility market looks somewhat cheap, but DIS has traded in a $5 range for the past 2 months. Add it all up, and the various factors are quite balanced, with no obvious trades.