Shares of Walt Disney Co (NYSE:DIS) were definitely blown away yesterday in front of Hurricane Irma. DIS stock sunk over 4% to close at $97.06, the lowest level of the year. The impending arrival of Irma certainly weighed on Disney shares, but it was the lowered guidance from CEO Bob Iger that accounted for most of the damage. While Disney may have room to fall further, I think DIS is approaching levels that make it a solid value play for the intermediate and longer term.
Speaking at the Bank of America Merrill Lynch 2017 Media, Communications & Entertainment Conference yesterday, the Disney CEO projected 2017 earnings guidance roughly in line with 2016 earnings. This would equate to per-share earnings of $5.72 in 2017 versus previous analysts estimates of $5.88.
InvestorPlace Market Strategist Anthony Mirhaydari does a deeper drill down on the lowered guidance coming out Disney. Even though growth has admittedly slowed in the short term, the plunge in DIS stock is getting overdone.
Disney now sports a very reasonable P/E of 17.18, well below the company’s five-year average of 19.83 and also at a big discount to the S&P 500 current P/E multiple of 24.58.
The previous two times Disney traded at a P/E below 17 proved to be significant lows in DIS stock. So from a fundamental viewpoint, Disney is looking comparatively attractive at current levels.
Click to Enlarge From a technical perspective, shares of Disney are approaching major support at the $90 level. Nine-day RSI is also extremely oversold at a 21 reading. Prior extremes in RSI coincided with lows in DIS stock in the past.
The technical outlook for DIS stock, combining major support on an extremely oversold stock, looks encouraging as well. But rather than jump in and grab shares of DIS now, I prefer to be patient and position to be a buyer at even lower levels. The options market provides the ability to structure a trade that pays you now to be a buyer later using a put credit spread strategy.
Given that implied volatility (IV) spiked in Disney options due to yesterday’s bloodbath, option prices have become more expensive. This makes option selling strategies even more viable.
DIS Stock Trade
Buy DIS Dec $85 puts and sell DIS Dec $90 puts for a 75 cents net credit. Maximum gain on the trade is $75 per spread with a maximum risk of $425 per spread. Return on risk is 17.64%.
The short $90 put strike is set at the major $90 support level and provides a 7.27% downside cushion to the $97.06 closing price of DIS stock.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.
