With the second half of the year comes another busy earnings season. Although broader indices stand around the levels where they were at the end of April, May and June were volatile both for the indices and many individual stocks.
I am going to discuss the short-term outlook for three stocks, namely Disney (NYSE:DIS), Electronic Arts (NASDAQ:EA), and Boeing (NYSE:BA), and encourage our readers to do due diligence prior to their upcoming quarterly reports.
All three stocks have shown robust performance in 2019, especially since early June. However, I believe there will be further volatility and some profit-taking with these names in the coming weeks. Investors may consider waiting on the sidelines if they do not currently have any positions open in DIS, EA or BA stocks.
Alternatively, if they already own shares, investors may either consider taking some money off the table during this market bounce or hedging their positions. As for hedging strategies, covered calls or put spreads with Aug. 16 expiry could be appropriate. Straight put purchases could be expensive due to heightened volatility. Any short-term decline in these shares may offer better entry points for long-term investors.
Disney stock is expected to report earnings on August 6. Wall Street will want to see whether the group’s diversified revenue streams remain robust for the second half of 2019.
Four segments generate Disney’s revenue:
- Media Networks (such as ABC and ESPN; 41% of revenue)
- Parks & Resorts (such as Disneyland and cruise lines; 34% of revenue)
- Studio Entertainment (including Lucasfilm and Marvel; 17% of revenue)
- Consumer Products & Interactive Media (including Disney Store and ESPN+; 8% of revenue)
On May 8, the company reported earnings for its second fiscal quarter. It logged revenues of $14.9 billion on earnings per share of $1.61 and beat analysts’ estimates on both the top and bottom line.
Results from Disney’s operating segments varied. CEO Bob Iger highlighted higher affiliate revenues from ESPN, as well as the popularity of its domestic theme parks. DIS also said that it would be repositioning itself towards direct-to-consumer services.
Shareholders would like to see another strong quarter when Disney reports earnings in a few weeks. Meanwhile, Netflix (NASDAQ:NFLX) earnings are expected on July 17. Wall Street’s reaction to NFLX stock’s earnings may also affect the share price of DIS stock in the second half of July.
In 2019, DIS stock is up 31% year-to-date. Let us briefly remember how the stock has traded since early April: On Apr. 11, prior to Disney’s investor day presentation, the share price closed at $116.60. The next morning, DIS stock gapped up to open at $127.91. Then, on April 29, DIS stock reached what was then an all-time high of $142.37.
In early May, Disney stock gave back some of its April gains, mirroring the stock market’s volatility. On May 31, the stock saw $130.78. June has once again been good to shareholders, as the stock reached an all-time high of $145.51 on June 18.
However, it may now be appropriate for current investors to take some of their impressive paper profits in Disney shares. In the next several weeks, I expect DIS stock to be volatile and its price to decline toward the $130 level, possibly until the company’s next quarterly report.
Electronic Arts (EA)
As a leader in the competitive video game industry, Electronic Arts develops and distributes esports games. Several of its well-known franchises include Madden, FIFA, and Battlefield.
The group is expected to report earnings on July 30, when Wall Street will be able to gauge the financial health of the company. EA is one of the largest gaming companies globally in terms of revenue and market cap. The group has two key sources of revenues:
- Products (i.e., digital or physical sale of games and additional content); and,
- Services (i.e., recurring revenue sources such as subscription-based models and in-game transactions)
On May 7, the video game publisher reported fiscal 2019 fourth-quarter financial results. Analysts were not impressed with the fact that sales and profits have been dented by intense competition from rival game makers.
In-game transactions which include “microtransactions” (such as new player skins or weapons) and “loot boxes” (whose contents players do not know prior to purchase) are lucrative yet somewhat controversial sources of revenue. Indeed, many gamers resent the idea of spending more money on games they already bought. Electronic Arts stock took a hit after some backlash from its microtransaction business practices.
In 2013, EA stock was trading at just over $10. Over the next few years, it became a darling among long-term investors. Then Electronic Arts stock had a rough second half of the year in 2018. In 2019, although EA stock is up 17%, it has been a roller coaster ride. Similarly, the stock price of Activision Blizzard (NASDAQ:ATVI), one of EA’s main competitors, has also suffered over the past year, mostly due to the competitive headwinds in the industry.
EA stock’s 52-week price range has been between $151.26 (July 13, 2018) and $73.91 (Dec. 26, 2018). Despite the price strength this year, I don’t think long-term investors should rush to buy into the shares just yet. While I would not bet against EA stock’s future, I expect to see further volatility and possible price weakness toward $90 in July.
Most investors are likely to wait on the sidelines until they have a chance to analyze EA’s balance sheet to see if the shares might be somewhat overvalued. They will also want to see if there is any growth fatigue or major trend changes in the industry. In an industry that offers both free-to-play titles and full-price games, investors do not yet know what the right mix of business models for Electronic Arts will be.
As the manufacturer of commercial and defense products, Boeing is one of the most important names in many portfolios.
However, Boeing stock price has been falling since early March, when Ethiopian Airlines suffered a fatal accident involving a Boeing 737 Max 8 aircraft. The March 10 crash was, unfortunately, the second deadly incident of the same model plane, one of Boeing’s most popular, in less than six months.
Following the tragedy, countries closed their airspace to Boeing’s 737 Max 8 one by one, until finally the U.S. Federal Aviation Administration (FAA) also grounded the top-selling jets. It’s likely that the grounding may continue for several more months.
The present concern regarding the safety of Boeing’s 737 Max planes offers plenty of questions. Later in the year, if Boeing is found to be at fault regarding pilot training or if the company cannot fix the hardware problems completely, BA stock may suffer further.
Boeing also needs to rebuild customer confidence. In other words, this disaster has raised serious questions about the the company’s design of these high-tech airplanes and the corporate actions — or lack thereof — after the crashes.
The on-going U.S.-China trade war worries have also added to the stock price decline of BA. The company has become one of the proxy names for the conflict. Over the past decade, the growth of China’s airline industry has created a massive export market for Boeing. In fiscal year 2018 alone, Boeing generated about $13.7 billion in revenue from world’s second-largest economy.
So what should investors think about BA shares right now? Long term, I would not bet against Boeing. Despite the problems, year-to-date BA stock is still up almost 11%.
Eventually the U.S. and China will come to a mutually beneficial trade agreement. And Boeing is likely to make its planes safer and gain consumer trust again. Sometime in 2020, its best-selling jet will probably return to the skies.
During the Paris Air Show that took place in June, Boeing secured an order for 200 737 Max jets from the British Airways parent International Consolidated Airlines Group (OTCMKTS:ICAGY). Although the full amount of the order is not yet known, it is suspected that BA offered a big discount to ICAGY. This purchase intent is not only a show of confidence in BA’s grounded planes, it is also a signal to shareholders that 2020 is likely to be a better year for the group.
Short-term, though, things could be choppy and somewhat of a mixed bag. A couple of sour trade headlines or Boeing 737 Max-related news in the next few weeks could drive BA stock further down.
Eventually, Boeing will have to foot the bill for the losses incurred by many airlines due to cancelled flights. On July 3, management also announced a compensation scheme for the survivors of the fatal crashes.
I’d say hold off investing in Boeing shares until the release of the full crash reports as well as BA’s next quarterly statement on July 24 to re-evaluate the financial impact of the crashes and the trade wars on the balance sheet.
At the time of writing, the author did not hold a position in any of the aforementioned securities.