What To Do With Disney While It's At Par

| About: The Walt (DIS)

Summary

Disney has been a stock market stalwart for ages, it just never seemed to move down.

That is until the company reported earnings in August of 2015 where the stock dropped like a rock from $120 to $95.

The company is set to report earnings after the market closes on August 9th.

Disney (NYSE:DIS) is known for having quite a diverse portfolio but what it is most known for is ESPN and an investor can pretty much say that it trades off of news about ESPN. During the most recent quarter which ended April 2nd, the company earned nearly $13B of which a little under $5.8B came from the media networks revenue segment. In the prior year the company made a little over that same $5.8B number.

From the media networks revenue segment the company further breaks down revenues into cable networks and broadcasting where cable networks, where ESPN resides, makes a little under $4B. From the prior year the cable networks made a little over $4B. The highlight of the quarter was due to increased operating income from ESPN. The increase in operating income at ESPN was thanks to lower programming costs and higher affiliate revenues, partially offset by a decrease in advertising revenue. Revenues dropped a little because of lower viewers' ratings and rates but it is reassuring that the company can put the clamps on expenses to increase operating income.

For that reason Disney has been eyeing ways of bringing that jewel outside of the traditional bundles offered by cable companies. It is inevitable that ESPN has to be unbundled from cable packages. I believe there are so many people out there that do not subscribe to cable because all they want is ESPN and not any of the other programming offered with ESPN. I for one am one of those people.

If Disney offered a streaming service that I could just pay for directly through a website I would be all for it and I am sure there are quite a few other Americans that would do the same. Even a buffet of channels would be great on a subscription basis where I would pick the football channel, the basketball channel, and say the general news channel for a monthly subscription; I am sure that would be a hit with other consumers.

The unbundling of ESPN by Disney is not a new strategic initiative the company has been considering, just last year CEO Bob Iger said that the ESPN affiliated shows can be offered separately. What this means for investors is this is part of the media networks value chain which can be exploited to bring higher revenue streams to the company. This initiative will be good for the likes of Disney but not the likes of the cable operators such as Comcast (NASDAQ:CMCSA).

Disney has been a stock market stalwart for ages, it just never seemed to move down. That is until the company reported earnings in August of 2015 where the stock dropped like a rock from $120 to $95. The stock would then recover those losses and move back to the $120 level only to drop back down to $88. After dropping to $88 in mid-February of this year the stock has come back to par (or $100) and stalled there. Since it has been floundering at $100 since February I believe it should make for a good trade when the company is set to report earnings after the market closes on August 9th.

The problem is I do not have a good sense of which direction it will be moving. So what I did was buy the August expiration $99.50 call and put. But I only did so by writing the August $102 call and the August $96 put to help pay for the price of the straddle I placed at $99.50. The implied volatility of the stock itself was relatively inexpensive and that is why I thought it would be a good trade.

One can argue that the whole media industry has been revalued with all the volatility surrounding Viacom (NASDAQ:VIAB) as well. But even with the revaluation of the industry Disney still trades at a premium relative to the rest of its peers as can be seen from the table below. It trades above the peer average in every category except on the price-to-cash ratio [P/C]. But an investor can also argue that it does deserve a premium valuation over the others because of all its properties, intellectual and physical alike. But with all this global uncertainty taking place these days I am leaning towards some downside in the name but still on the fence about it even.

Company

Ticker

P/E

Fwd P/E

PEG

P/S

P/B

P/C

P/FCF

Comcast

20.3

17.1

1.6

2.2

3.1

-

27.0

Disney

18.4

16.2

1.8

3.0

3.7

32.3

27.7

Time Warner

(NYSE:TWX)

15.9

13.1

1.1

2.2

2.7

40.1

-

Fox

(NASDAQ:FOXA)

23.8

13.5

1.8

2.0

3.7

10.8

28.7

CBS

(NYSE:CBS)

18.0

12.7

1.0

1.9

4.7

64.2

17.6

Viacom

8.0

9.0

1.6

1.4

4.5

37.4

15.3

Min

8.0

9.0

1.0

1.4

2.7

10.8

15.3

Max

23.8

17.1

1.8

3.0

4.7

64.2

28.7

Avg

17.4

13.6

1.5

2.1

3.7

37.0

23.2

Median

18.2

13.3

1.6

2.1

3.7

37.4

27.0

Click to enlarge

As I mentioned earlier, the company is set to report earnings after the market closes on August 9th. Of the 31 analysts covering the bottom line the average estimate is at $1.61 with a high of $1.72 and low of $1.53. For the record the company reported $1.45 at this time last year. There are 28 analysts covering the top line with an average estimate of $14.2B with a low of $13.8B and high of $14.8B as the company reported $13.1B last year. I am not long or short the name right now but depending on this move after earnings I may take a position either way, I just do not know which way it is right now.

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.