It’s time for Walt Disney Co (NYSE:DIS) investors to admit that the golden era of TV is gone. Personally, I love Walt Disney stock. I’m glad Disney took over the Marvel and Star Wars franchises, the latter of which we were all but guaranteed never to see another movie otherwise. My kids enjoy Disney movies and TV shows and their eyes lit up when we took them to Disney World for the first time last year.
But the problem for Walt Disney stock doesn’t lay with Disney princesses or the carefully constructed worlds in which it immerses both moviegoers and theme park attendees. The problem lies with the death of traditional pay TV. Netflix, Inc. (NASDAQ:NFLX) and a cadre of other online streaming companies have changed the TV landscape forever, and there’s no going back.
James Brumley summed the situation up best with the following:
“Most investors may not realize it, but television drives more revenue for Walt Disney than movies and theme parks do, and within the TV arm, ESPN is the biggest rainmaker. That’s why the demise of ESPN has proven so problematic from time to time for Walt Disney stock.”
The fact is, ESPN and the pay-TV model are hemorrhaging subscribers. Cord-cutting is no longer just a fad, it’s a harsh new reality and you can’t just blame it on the weather — I’m looking at you AT&T Inc. (NYSE:T).
Disney is set to release its fourth-quarter earnings report on Thursday this week, and things are going to get a bit tricky. The company is already preparing to move on from pay TV, investing $1.58 billion in BAMTech — the firm that handles Major League Baseball’s online streaming service. But while this initiative shows a positive move toward the future, ESPN needs a solution now.
Unfortunately, for Walt Disney stock investors, “now” won’t happen soon enough. Even if it does, ad revenue from online streaming has proven to be well below that of traditional pay-TV sources. In short, expect revenue from Disney’s TV arm and ESPN flagship to continue to decline rapidly for the time being.
This leads us to this quarter’s numbers. Wall Street is expecting a profit of $1.14 per share from Disney — a figure that has been adjusted steadily lower over the past three months. Revenue now expected to come in at $13.27 billion after being lowered since Disney’s last trip into the earnings confessional.
While Disney has a history of hitting expectations, the shares are still down more than 6% so far this year, shedding nearly 15% from their late-May peak. Once again, ESPN and declining TV revenue is the problem.
Click to Enlarge The one saving grace for Walt Disney stock is that expectations have been lowered considerably. For instance, Thomson/First Call reports that 14 of the 32 analysts following DIS rate the shares a “hold” or worse. Walt Disney stock’s 12-month consensus price target of $110.11 also represents a modest premium of just 11.6% to yesterday’s close.
Furthermore, Walt Disney stock options traders are considerably more bearish. Currently, the November put/call open interest ratio rests at 1.78. This ratio has pulled back from a late-October high of 1.90, however, as some speculators are pricing in a rebound from current levels following earnings.
Overall, November implieds are pricing in a potential post-earnings move of about 4.4% for Walt Disney stock. This places the upper bound near $103, while the lower bound lies near $94.
If you read my previous pre-earnings breakdown of Walt Disney stock, you know that I was targeting a breakout above $100 following earnings. I’m a little less optimistic about the size of this move now but would expect DIS to trend higher as long as Disney has something positive to deliver in its efforts to move ESPN online.
2 Options Trades for Walt Disney Stock
Put Sell: Back in October, I put the bull call spread as my preferred trade for Walt Disney stock. I’m moving that to a put sell now as a precaution against a flat response to ESPN trouble — which should be mostly priced in at this point.
The Nov $92.50 put remains a solid option for banking on support. While the bid on this option is down from it’s Oct. 20 perch near 41 cents, the current bid of 26 cents, or $26 per contract, is still quite attractive.
As long as Walt Disney stock trades above $92.50 through expiration, traders pursuing this strategy will keep the $26 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.
Call Spread: I’m not ruling out a rebound for Walt Disney stock, I have just come to believe that it’s a bit more of a long shot than before. Traders looking to bet against the grain might consider a Nov $100/$101 call spread.
At last check, this spread was offered at 25 cents, or $25 per pair of contracts. Breakeven lies at $100.25, while a maximum profit of 75 cents, or $75 per pair of contracts — a potential 200% return — is possible if Walt Disney stock closes at or above $101 when November options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
