Disney Earnings Could Beat Again, But Street Cares More About ESPN's Future

| About: The Walt (DIS)

Summary

ESPN, once the leading generator of DIS revenue, has dropped to 28% of total revenue from 33%, according to the company.

DIS earnings results are still expected to be strong relative to one year ago.

DIS implied volatility is trending high at the 74th percentile. Short-term options traders expect a potential 7.5% move in either direction for this stock around its earnings release.

Sports broadcasting property ESPN has been a notable revenue driver for its parent Disney (NYSE:DIS), but more of its viewers are cutting the cord. Traditional TV watching looks a lot different in many homes and Disney, which is reporting its fiscal Q1 earnings after the closing bell Tuesday, may have to rethink revenue.

Some assurance of next steps are what investors are likely listening for on the post-release conference call, no matter if earnings outperform Street expectations as they've done for four straight years.

The cord-cutting phenomenon is picking up speed as viewers switch to streaming services like Netflix (NASDAQ:NFLX), Hulu, and Sling TV. And it's hurting ESPN's viewer base, industry analysts stress. In a separate earnings report, which could set the tone for Disney, Viacom (VIA.B) reported a drop in its media-networks business and filmed entertainment revenue, noting "industry disruption" in the cable-networks business.

In the most recent quarter, DIS said ESPN was losing subscribers "by the millions"-to 92 million as of October from 99 million just two years ago. ESPN, once the leading generator of DIS revenue, has dropped to 28% of total revenue from 33%, according to the company.

Still a 'Force'?

Blockbusters including "Star Wars: The Force Awakens" are expected to help bolster both the top and bottom lines, but some investors and Street analysts worry that ESPN's shrinking subscriber base could be a long-term headwind that could undercut the Star Wars franchise's haul.

Now, let's make it clear. DIS earnings results are still expected to be strong relative to one year ago. Analysts reporting to Thomson Reuters are forecasting a per-share profit of $1.45, up 14% from the year-ago earnings of $1.27. Revenue is projected to climb nearly 10% to $14.7 billion.

But is it sustainable? Traders have already expressed a degree of uncertainty through their punishment of shares. The stock, which had been on a steady upward trajectory since 2011, has taken some big tumbles since hitting a 52-week high in August; it lost 22% in that month alone (figure 1).

Traders are Active

Pending earnings are stirring interest. DIS implied volatility is trending high at the 74th percentile. Short-term options traders expect a potential 7.5% move in either direction for this stock around its earnings release, according to the TD Ameritrade thinkorswim platform's Market Maker Move indicator. There's been significant buying of the weekly 89 put options and the 91.5 put options, while interest in the call option side is more muted, although with some buyers of the monthly 95 calls.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

Click to enlarge

Figure 1: Downhill for Disney? Since the beginning of the year, Disney stock has retreated better than 12%. Chart source: TD Ameritrade's thinkorswim platform. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. Commentary provided for educational purposes only. Past performance is no guarantee of future results or investment success.

Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before investing.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.