Back in August, Walt Disney Co (NYSE:DIS) took a crucial step toward solving its biggest problem. The company invested $1.58 billion in a majority stake in BAMTech — the firm that handles Major League Baseball’s online streaming service. You see, Disney’s biggest problem is cord-cutting. More specifically, ESPN is hemorrhaging subscribers, and the trend has been devastating to DIS stock.
Despite strong box office revenue, driven by the reboot of the Star Wars franchise, and continually improving theme park attendance, Disney stock has fallen more than 14.5% since the beginning of May. And ESPN is the millstone.
So, when Disney steps into the earnings confessional after the close on Nov. 9, investors will likely give the company’s top- and bottom-line figures a once-over. After all, Disney has topped Wall Street’s targets in the past three quarters. The bigger focus next month will be on any news regarding Disney’s online streaming plans and what it plans to do about ESPN.
For those interested in the numbers, the consensus is looking for a fourth-quarter profit of $1.15 per share from Disney, with revenue expected to come in at $13.34 billion.
On the sentiment front, opinions are mixed as to whether Disney can salvage its ESPN unit. According to Thomson/First Call, 14 of the 32 analysts following Disney stock rate the shares a “hold” or worse, and the 12-month consensus price target of $110.32 represents a modest premium of just 11.4% to yesterday’s close.
Click to Enlarge DIS stock options traders are considerably more bearish heading into the company’s quarterly report. For instance, the November put/call open interest ratio has risen to an annual high of 1.9, with puts nearly doubling calls among options most affected by Disney’s quarterly report.
Overall, November implieds are pricing in a potential post-earnings move of about 4.75% for DIS. This places the upper bound near $103.70, while the lower bound lies near $94.30.
A breakout above $100 would be considerable for DIS stock, as it could mark a turnaround for the shares. But such a move might only be possible if Disney offers up some plan for moving ESPN online and dealing with subscriber losses.
On the other hand, a drop to the $93-$94 range could send the shares ultimately down for a retest of support near $90.
2 Trades for Disney Stock
Call Spread: While better-than-expected numbers from ESPN might be a long shot, news on the company’s plan to turn things around and open its own streaming options are not. Disney has had since August to get things together and formulate a plan. Any news on this front will likely be consider positive, and with a wealth of pessimism levied against the shares, an unwinding is highly likely.
Traders looking to bet against the grain might consider a Nov $100/$105 call spread. At last check, this spread was offered at $1.35, or $135 per pair of contracts. Breakeven lies at $101.35, while a maximum profit of $3.65, or $365 per pair of contracts — a potential 170% return — is possible if Disney stock closes at or above $105 when November options expire.
Put Sell: If you are looking for a more neutral-to-bullish strategy on DIS, then a November $92.50 put is a good starting place. At last check, this put was bid at 41 cents, or $41 per contract. As long as DIS stock trades above $92.50 through expiration, traders pursuing this strategy will keep the $41 premium.
However, if DIS trades below $92.50 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $92.50 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.