$DIS – Splash Mountain?

by Dan May 10, 2016 12:51 pm • Commentary• Trade Ideas

Event: Disney (DIS) will report fiscal Q2 results tonight after the close. The options market is implying about a 3% one day post earnings move (last quarter implied move was 5.5%), which is below the 3.9% 4 qtr average one day move, and  the 10 year average of about 3.4%. 

Price Action / Technicals: After being down about 18% on the year at its lows in February, shares of DIS are now up about 1%, but still down 18% from their 52 week and all time highs made last August.

On a 6 month basis, the stock just broke out above an important technical resistance level, the breakdown level to start the year:

[caption id="attachment_63527" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

Taking a longer term view though, the stock is now butting up against the long term uptrend, which could serve as technical resistance, while despite the very healthy bounce from the February lows, the stock is apparently in a downtrend from the August highs, making two lower lows and two lower  highs:

[caption id="attachment_63528" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]


Estimates & Forecasts from Bloomberg

-2Q adj. EPS est. $1.40 (range $1.34-$1.54)
-2Q rev. est. $13.21b (range $12.53b-$13.77b)
-2Q segment rev. ests. (avg of 4):
-Media $5.93b
-Parks & Resorts $4.05b
-Studio Entertainment $1.88b
-Consumer Products & Interactive Media $1.33b
-2Q segment OI ests. (avg of 4):
-Media $2.34b
-Parks & Resorts $597m
-Studio Entertainment $468m
-Consumer Products & Interactive Media $452m


Looking at the segment revenues above, its important to note that despite all of the focus of late on the movie studio with hits like Star Wars, Captain America, Zootopia and The Jungle Book, analysts are expected sales in that group of less than 15% of the total. On the flipside the Media division, where most of the concerns about subscriber losses at networks like ESPN have caused the volatility in the stock, are likely to remain for the time being.  The WSJ highlighted this earlier:

-ESPN AND CABLE BUNDLES: Due largely to the timing of sporting events, advertising revenue may be down significantly at the sports network, predicted Nomura analyst Anthony DiClemente. But the bigger question for shareholders, as it has been since last year, is subscriber numbers, affiliate-fee revenue growth and the impact of inexpensive “skinny bundles” on Disney’s largest business: television.

My View Into the Print: The 11% bounce in the stock in the last month might discount any and all good news near term.  Investors know that their movie studio has been killing it, and that Parks have been strong, but there seems to be considerable debate over the severity of subscriber losses and advertising revenues lost associated with over the top offerings/cord cutters.  Commentary about Media division and these trends will drive the stock.

It’s my view that it won’t just take a beat and raise to get the stock going materially higher than the implied move.  With earnings out of the way for media peers like TWX and CBS, I think it is safe to say that a huge surprise is not in the cards.

Possible Hedge for Long Holders:

If I were long the stock and fearful of a sharp drop, I might consider a zero cost collar. For instance with the stock just above $106, against 100 shares of existing long stock, you could sell one of the May 13th weekly 110 calls at 58 cents and buy one of the May 13th weekly 102 puts for 58 cents. This collar would allow for gains up to $110 between now and Friday’s close, losses between current levels and $102, and protection below.