Last night I went to see the new Star Wars movie, the Force Awakens with my wife and two daughters ages 10 and 12. We were blown away. My wife and I, who saw the originals in the theaters in the late 1970s/early 1980s, felt a sort of time warp back to the age of our kids. Our kids, who like us were scarred by the memory of the prequels of the late 1990s/early aughts, were able to forget that unfortunate part of Star Wars lore and utterly enjoy the reboot. They are now sad that they will have to wait until May 26, 2017 for the next installment.
If the Star Wars franchise was a stock it would be trading at all time highs. Investors would be fawning over it, Wall Street analysts would be tripping over each other to raise targets and estimates this morning, shorts would be getting ravaged, valuation would defy traditional metrics and blow away its peers… it would be like Netflix (NFLX). But LucasFilms, the maker of the franchise is owned by Disney (DIS), and while DIS is up nearly 20% on the year, gaining more than $30 billion in market cap, massively outperforming the S&P 500 (SPX), the Star Wars franchise will contribute less than 10% of the company’s expected $56 billion in revenues in the current fiscal year with investor’s greater focus of their tv networks business (nearly 50% of their operating income) and their cash cow ESPN.
The point of this post is that no matter how much people love the new Star Wars it’s probably not a great reason to run out and buy DIS stock. DIS trades at about 20x expected fiscal 2016 earnings that consensus estimates have growing 9%, on a 7% sales increase. Does DIS deserve to trade at a premium to the market and its peers? No doubt about it. So with the stock up 20% on the year, down 8% from its all time highs made in early August, and up 25% from its late August lows, I’d be surprised in the coming weeks/months if you don’t get a shot to buy it somewhere closer to $100. Why? Because the stock market is a discounting mechanism, and much of the current enthusiasm about Star Wars is likely “IN” the stock, for now.
I am not making a bearish case on DIS. Not even near term. But if you think that Marvel, LucasFilms & Pixar, coupled with DIS’s existing franchises will be driving ticket, apparel & park sales for decades, and that the cord cutting concerns that have weighed on the stock since its highs will eventually abate, then you’ll want leg into a long in DIS shares for more than a short term time horizon.
On numerous occasions in the last few months we have detailed options trade ideas that use the sale of downside puts to finance owning upside calls (here from Dec, here from Nov, here from Sept) for those that thought the stock would run into this week’s release of the movie. I would add that as the excitement of the movie fades, as we head into the new year, investors may once again turn their focus to cord cutting and losses of viewers at ESPN. For those looking to cautiously leg into a DIS long, routine downside put selling could be a great way to do it, we’d likely start 2 months out down about 10% as short dated options prices are elevated, with 30 day at the money implied vol nearing 29%, well above the one year average of about 21%: