MorningWord 12/24/15: A Total $DIS

by Dan December 24, 2015 10:06 am • Commentary

A year ago, as the calendar was about to turn, few would have pegged Disney (DIS) to be a battle-ground stock 0f 2015. ESPN, their cash cow, was flying on all cylinders. And there were expectations of a massive year from their movie studios with a Summer release of Marvel’s Avengers Age of Ultron and Pixar’s Inside Out and December’s reboot of Star Wars franchise with The Force Awakens.  All three movies will be in the top five grossing movies domestically in 2015, and top six globally.

Interestingly, DIS’s non-animated redo of Cinderella didn’t even crack the top ten globally with $550 billion, just above Marvel’s Antman in the league tables.  These five movies will likely gross $4.5 billion globally in 2015 (not counting apparel and licensing). While that’s a ton of loot, that’s actually less than 10% of DIS’s trailing 12 month sales of $52 billion.  In fiscal 2015, ended in September, their Studio Entertainment segment equaled $7.4 billion sales, only 14% of its total of $52 billion, and $3 billion of its $14.7 billion of operating income. It’s really Media Networks (think ESPN) and Parks that are driving the train. From DIS FY15 Form 10k:


But movies are important to Disney. And if it weren’t for CEO Bob Iger’s movie studio buying spree that started with his $7.4 billion purchase of Pixar in 2006, the $4 billion purchase of Marvel in 2009, and his $4 billion buy of LucasFilms in 2012 we might be focusing a whole heck of a lot more on subscriber losses at ESPN right now.

And what does Iger get for that foresight? A 3.4% pay decline in 2015, (granted that to just under $45 million!)  If there was ever a Fortune 100 CEO that deserved an eye-popping number it’s Iger.

The stock is still up 12% on the year but it’s down 14% from its all time highs made in early August. But suddenly investors seem less than sanguine. The 8% month to date decline, and massive under-performance on a day like yesterday, down 1% vs the S&P 500 (SPX) up 1.25% is indicative.

So if you are trying to get your arms around DIS’s under-performance since early August, I think it makes sense to consider the fact that the stock still massively out-performs the broad market year to date, and it could still incorporate a ton of positive sentiment surrounding a headline grabbing segment that is NOT driving the train.

DIS is a premium brand, with no shortage of premium products, but I think we have a classic situation of investors buying the rumor and selling the news. And there could be another leg of selling surrounding continued subscriber losses at ESPN in the New Year. DIS trades at about 2x (18.5x) its expected fiscal 2016 eps growth rate of 9%, above a market multiple, but below its five year average.  At about $100, the stock will trade at about a market multiple, where I suspect investors might start to discount the negative headlines around cord cutting in their networks division.

For those who might consider valuation levels where they would be inclined to legging into a long trade in DIS, I think it makes sense to consider that a re-test of the 5 year up-trend (just below $100). That will be a fairly critical level from both a technical and sentiment standpoint:

DIS 7 year chart from Bloomberg
DIS 7 year chart from Bloomberg

In some instances like this we might consider using naked put sales to “leg int0” a long (as we detailed in Disney last week), but given the news flow, the fact that the stock is still up 12% on the year outperforming the broad market, those looking to be contrarian on the long side may well do better to define their risk with long premium call spreads, or short premium put spread sales.

We’ll keep out eye on this stock. 100 suddenly looks like it’s in the cards and at that point we’ll have a decision to make if we want to dive in from the long side and how we’d do it with options. Stay tuned.