New Trade – $DIS: Mouse Trap?

by Dan January 30, 2015 2:48 pm • Commentary

Disney (DIS) reports their fiscal Q1 earnings Tuesday after the close, the options market is implying a 3% on day move, vs the 4 qtr avg move of only 1.7%.  The stock is obviously not a huge mover on earnings, but next week’s report could be different for a few reasons.  First things first, large cap market darlings of the last couple years of the bull market are not immune to minor hiccups (see AXP, JPM, MSFT, PG & UPS).  Part of the reason is that as volatility across other risk assets has increased, it has caused investors to re-evaluate what they own and why.  For instance, paying 21x expected earnings in PG that are expected to be flat, with no sales growth, for the dividend yield with the stock near all time highs??? Pahlezzzz.

After DIS reported Q4 in early November, the stock took a fairly short pause as strength in the Parks division and strong studio performance from Guardians of the Galaxy was offset by weaker than expected results in their Media unit as ad pacing declined at their crown jewel ESPN.

Just this week we got poor results from the cruise lines, as they face headwinds from the strong dollar. Disney gets more than 40% of sales from overseas.  DIS is much less exposed to the dollar strength, but it is important to note that the strong dollar can have an effect on foreigners coming to the U.S. to vacation which could be a headwind to the Parks division.  The fact is, I doubt the results differed too much, but the risk taking environment among investors might have.

I would add one more point, DIS’s movie pipeline is massive, Avengers Sequel in May, Star Wars in December, and a couple dozen movies from their core franchises (including Toy Story in 2017) over the next three years. The purchase of Marvel Entertainment and Lucas Films will likely be DIS CEO Bob Iger’s crowning achievements. But in the near term, tough comparisons from the Frozen success that spread into early 2014 has caused analysts to expect a sharp earnings deceleration from 28% in 2014 to 8% in 2015, with sales growth declining from 8% to 6%. With the stock trading near 20x expected 2015 earnings growth of 8%, it looks expensive.

Taking a quick peak at the chart, the stock has obviously lost a bit of momentum, after spending most of 2013 and 2014 in a very consistent uptrend. I like playing for a break below $90 on the print with the stock finding some support in the mid to high $80s:

DIS 1yr chart from Bloomberg
DIS 1yr chart from Bloomberg

I am going to start a defined risk position now, leaving room to add next week as I will have two full trading days prior to the report:

TRADE: DIS ($92.05) Buy Feb 92.50 / 87.50 Put spread for 1.50

-Buy 1 Feb 92.50 put for 2.10

-Sell 1 Feb 87.50 Put at .60

Break-Even on Feb Expiration:

Profits: between 91 and 87.50 make up to 3.50, max gain of 3.50 below 87.50

Losses: up to 1.50 between 91.20 and 92.50, with max loss of 1.50 above 92.50


This is a nice risk reward set-up into the event. If I’m wrong it’s a small % of the overall stock, but if right I get an outsized payout on the event move. I’ll circle back to this trade before the event as I started small with the idea that I may need to make some adjustments to strikes depending upon where the stock is Tuesday afternoon prior to the report.