Corporate earnings roll on this week, and media giant Walt Disney Co (DIS) is among the headliners. While quarterly results won’t be ignored, guidance will be the key for Disney’s stock price. Specifically, the growing cord-cutting movement may mean that ESPN and Disney’s other cable offerings may overshadow its Marvel and Star Wars successes at the box office.
Diving into the numbers, Disney is expected to post a fourth-quarter profit of $1.45 per share, up 14% from year-ago results. Revenue is seen rising 10.2% to $14.76 billion on the quarter. Historically, Disney has bested Wall Street’s targets in every quarter for the past two years.
Given the blockbuster success of Star Wars: The Force Awakens, Disney should have no trouble topping the consensus once again. Even EarningsWhipser.com reports that expectations may range a bit higher, with the whisper number arriving at $1.48 per share.
However, ESPN and declining cable subscribers remains the 800-pound gorilla in the room. Personally, I believe that media companies and many analysts are underestimating the cord-cutting movement. Any signs of continued or increased erosion in cable subscriptions in Disney’s guidance could be a lodestone for DIS stock.
On the sentiment front, analysts have begun to express doubts on DIS stock. According to Thomson First Call, the bulls are still in control, with 18 buy ratings, but the naysayers are gaining ground, with 15 holds and one sell rating. Additionally, the 12-month consensus price target of $110 represents a modest premium of just 17% to DIS’s Friday close.
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Turning to the options pits, we find that puts are growing in popularity on DIS stock. Currently, the February put-call open interest ratio arrives at 0.93, with puts and calls in near parity. Bearish sentiment rises markedly when we zero in on the weekly Feb. 12 series, with the put-call open interest ratio jumping to 1.02, indicating that options traders are a bit nervous about Disney’s quarterly report.
Click to Enlarge Overall, weekly Feb. 12 series implieds are pricing in a potential post earnings move of about 5%. This places the upper bound near $98, while the lower bound lies near $89. Technically, resistance lies in the $96 region in the form of DIS’ 20-day moving average, while key support rests at $90. Implieds are pricing in a move that could see DIS break out of this range.
2 Trades for DIS Stock
Put Spread: DIS has been in trouble for a while, and the shares may not have found a bottom yet if guidance has any major impact on the stock. With growing doubts among both options traders and analysts, there is plenty of room for the situation to deteriorate further before it gets better. As such, traders looking to bet on a post-earnings decline in DIS stock might want to consider a Feb $90/$92 bear put spread.
At last check, this spread was offered at 76 cents, or $76 per pair of contracts. Breakeven lies at $91.24, while a maximum profit of $1.24, or $124 per pair of contracts, is possible if DIS closes at or below $90 when February options expire.
Call Sell: If betting directly against DIS stock isn’t your style, you might consider entering a weekly Feb. 12 series $100 strike call sell position. Such a trade is especially useful if you already own DIS stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $100.
At last check, this option was bid at 58 cents, or $58 per contract. A sold call allows you keep the premium as long as DIS stock closes below $100 at expiration. On the downside, if DIS rallies above $100 prior to expiration, you could be forced to provide 100 shares at current market value for each call sold, which could be quite costly if you do not have enough stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
