Weekly Outlook: Buy Disney and Sell Exxon Mobil

Includes: CSCO, DIS, QQQ, SPY, XOM
by: David Ristau


The stock market had its worst week since June as the market moved on low volume and looked to begin an inevitable correction after many weeks of upside. The issue for the market stemmed more from general malaise and lack of buyers rather than weak data. In fact, data throughout the week was good. An end to QE, though, seems to be on the horizon and Fed officials as well as Goldman Sachs claimed that things would begin to taper in September. This week, we have a larger slate of data that should get investors back into the market. The direction, though, is a mystery to us. We could very well see the market continuing lower, but a larger slate of positive data should help to get things reversed.

Chart Overview

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The chart above shows some light correcting that the market has done over the past several days, but as we can see, it really was not a ton in the S&P 500 (NYSEARCA:SPY). A larger drop down to 1650 could definitely happen on the taper of QE. At the same time, we are testing 20-day MA support, and we could bounce right back if the round of data is very solid and supports a taper.

Economic Data


Data Report

Market Expectations

Previous Report

August 13

Retail Sales - July



August 13

Business Inventories - June



August 14

PPI - July



August 14

Crude Inventories - 08/10



August 15

Initial Claims - 08/10



August 15

CPI - July



August 15

Empire Manufacturing - August



August 15

Industrial Production - July



August 15

Philadelphia Fed - August



August 15

NAHB Housing Market Index - August



August 16

Housing Starts - July



August 16

Building Permits - July



August 16

Michigan Sentiment - August



It is a major week for economic data in the market with important data on each day Tuesday through Friday. On Tuesday, the market will be reacting to Retail Sales, which are expected to be weaker than previously thought. PPI and CPI showed some inflationary signs for June, and we are very interested in these results. If they show no signs of inflation, it may quell some taper fears. On Thursday, Empire Manufacturing, Philly Fed, Industrial Production, and NAHB Housing Market Index. Empire and Philly Fed were very solid in July, and they need to be solid again to reverse the market's trend. We setup for next week with Housing Starts, Building Permits, and Michigan Sentiment on Friday. Housing was weak for the last month, and a recharge of those stocks would go a long way to helping trader/investor appetite. If they are weak, it could really help a correction start.

Foreign Markets

Outside of the USA, Europe and Asia will continue to be crucial to the market this week. We get Japan's GDP on Monday, which will be very important to the market. On Tuesday, we will be getting a healthy slate of data from Europe with Germany and British price indices, eurozone Industrial Production, and the German ZEW Survey, which is an important barometer of economic confidence in Europe. On Wednesday, we will be getting French, German, and eurozone GDP. Europe has started to show some recent shoots of recovery. These two days will go a long way to determine if that is true. Europe could go a long way to instilling some confidence back in the market.



Key Company

August 12

Sysco (NYSE:SYY)

August 13


August 14


August 14

Macy's (NYSE:M)

August 15

Wal-Mart (NYSE:WMT)

August 15

Estee Lauder (NYSE:EL)

August 15

Nordstrom (NYSE:JWN)

Earnings are lighter this week, and we believe that they are limited in their influence. The keys are Cisco, Macy's, Wal-Mart, and Nordstrom. Cisco will be key for the Nasdaq (NASDAQ:QQQ) and we are very curious about WMT and JWN. WMT is a major economic bellwether and JWN is key to seeing how luxury spending is doing. Overall, though, with a full plat of data, important overseas information, and the Fed overhang, these reports should only go a small way to influencing this week's action.

Fed Outlook

The Fed hurt the market last week with speeches suggesting taper was on the way. This week, we get one key speech from Fed Lockhart on Tuesday. Other than that, the week is light, but the Fed will be the backdrop for the rest of the market. The Fed's taper is the key to the market this week, and if the economic data or inflation measures from CPI and PPI show more inflation, taper is very likely. The way taper will be affected by different data points is really the key to this week.


The market has a critical week due to a potential drop in the market, and we have a lot to process this week. The market should see a lot of reaction to housing, retail sales, and CPI/PPI data. The potential for taper should be on the tips of traders' tongues, and if the market can quell those fears with very positive data and/or more deflationary signs, things could rebound.


Ticker: Walt Disney (NYSE:DIS)

After hitting a top of $67 prior to earnings last week, Disney has pulled back some from those levels after their earnings report. Today, we want to look at whether or not now is a good time to buy that stock after its post-earnings pullback. In the company's latest report, DIS reported solid strength at ESPN and theme parks, but the company is going to likely report a $160M - $190M loss in The Lone Ranger. Additionally, the company did not see the follow through in Iron Man 3 that they saw in The Avengers last year. Their studio revenue saw a 2% decline year/year.

At the same time, though, networks saw an 8% rise in operating income on 5% rise in revenue as margins expanded with EPSN increasing advertising revenue. The networks business continues to be very promising for the company, and with the sports world continuing to be very promising, ESPN will continue to be a source of growth. Additionally, the company saw a 7% rise in revenue at theme parks with higher attendance volumes and better food and beverage spending. Theme park revenue looks very solid moving forward.

We want to do a pricing on the company after these recent results to see how much upside is in shares over the next twelve months. We believe that the long-term portions of the business like networks and theme parks will remain solid. The studio side is always variable, but for every loser like The Lone Ranger and John Carter, the company has a lot of winners like Oz, Monsters University, and Brave. We also like the pipeline of coming movies. National Treasure 3 should be a summer box office hit next year. The company is doing a re-imagining of Cinderella next year as well.

Let's take a look at pricing in the company. We are using the following information for pricing. We are looking for growth of operating income of around 10% this year with 12% in the following year, as we believe the comps for the studio division will be lighter with a more dull summer from LTR and IM3. Beyond that, we look for 6-8% growth in operating income, as we would expect some cyclical pullback in theme parks.

Step 1.

Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.

2013 Projections

2014 Projections

2015 Projections

2016 Projections

2017 Projections

Operating Income


















Capital Expendit.






Working Capital






Available Cash Flow






Step 2.

Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for DIS: 7.8%






PV Factor of WACC






PV of Available Cash Flow






Step 3.

For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for DIS: 4.3%


Available Cash Flow


Divided by Cap Rate


Residual Value


Multiply by 20167PV Factor


PV of Residual Value


Step 4.

Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:

Sum of Available Cash Flows


PV of Residual Value


Cash/Cash Equivalents


Interest Bearing Debt


Equity Value


Step 5.

Divide equity value by shares outstanding:

Equity Value


Shares Outstanding


Price Target


In the model, we see DIS worth $82, showing 28% potential in the company over the next twelve months. The small dip from studio business is helping to give an opportunity on the network and recreation side of the business.

Ticker: Exxon Mobil (NYSE:XOM)

Right now, we are not high on XOM. The main reasons for this is that we believe a cyclically weak period in the market will hurt lofty, overvalued oil prices and recent earnings have put a strong resistance line on Exxon Mobil. In the company's latest report, XOM reported some very weak numbers with lower volumes, thin margins, and a 14% drop in EPS year/year. The real issue for the company is dropping margins as well as issues with volumes.

The company saw a 70% decline in downstream earnings year/year. Most of the decline was due to planned maintenance activities at refineries. The company noted that it's had 9% of its refining capacity offline in the quarter, which was well above the usual 4-5% range. The real issue, though, (since capacity issues are short-term) was the company's WTI-Brent spread, which hurt the company's margin due to much higher prices in WTI in comparison to Brent. That spread is unlikely to see a large divergence as well anytime soon.

One major issue we are seeing with XOM moving forward is the same with other major integrated oil/gas names. Margin expansion may be tough for the company as costs continue to rise and return on assets fall. Over the past five years, capital expenditures have risen 123%. At that same time, sales have risen 19% and net income has risen 11%. Not a good rate. The problem is that the search for oil continues to grow an issue and while higher prices may occur as part of the process, it is actually not good for oil companies, as it tends to mean that demand weakens at some point.

The company's move into shale was supposed to be a big win as well for the company and bring in much needed profits, but the company has continued to see little payoff from the investment due to the company's exposure to low natural gas prices. In the latest quarter, XOM noted that they were still seeing issues from natural gas due to depressed prices. The company believes a rebound will happen here, and at this point, natural gas is the key. The company needs to see a rebound in prices to make good on their $31B acquisition of XTO.

Over the next three months, we are also worried about oil prices. Oil prices rose dramatically in July due to the issues in Egypt, but we believe that if taper comes in September, it will start a pullback in August. Taper will mean that less money flows into the market and that strengthens the dollar. A strengthening of the dollar will hurt oil prices. That rise hurts XOM somewhat in that WTI will weaken, but the spread may help them in comparison into Brent.

Overall, though, we do not see much upside for the company. We see a lot of resistance at the $94-$95 level, and we like the company for a bear call spread moving forward. We like a 95/97.50 Oct2013 bear call spread, which is offering a 14% return right now for investors. We like this as a hedge for longs and/or to help give one some bearish exposure on any pullback.

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

Business relationship disclosure: I have no business relationship with any company whose stock is mentioned in this article. The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article