Disney's Stock Faces Further Declines

Apr. 15, 2020 3:14 PM ETThe Walt Disney Company (DIS)83 Comments

Summary

  • Disney may be one of the most exposed companies during this coronavirus lockdown.
  • Options traders are betting the stock falls below $90 by the middle of May.
  • The technical chart is weak and indicates shares may fall further.
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Disney (NYSE:DIS) may end up being one of the hardest-hit companies in this post-coronavirus world. It seems hard to find a part of their business that isn't getting severely impacted, with the exception of their streaming service. It likely means the company will see a dramatic impact on its revenue and earnings outlook.

Analysts have been slashing their revenue estimates for the company. Since January 15, analysts have been cutting their revenue outlook for the fiscal year 2020, by 12.4% to $71.7 billion. Meanwhile, earnings estimates have dropped by 41% to $3.20. The bleak outlook for the company is likely the main reason why options traders are betting the stock falls below $90 by the middle of May.

Impacts

In the fiscal first quarter, reported on December 31, the company had media revenue $7.4 billion, theme park, experiences, and product revenue of $7.4 billion, studio entertainment revenue of $3.7 billion, and direct to the consumer revenue of $3.98 billion.

It seems safe to say that the theme parks, experiences, and products segment is likely to see a significant hit to its revenue, as well as the studio entertainment.

With the absence of live sports, the media division could see a decline in advertising revenue, which was $2.0 billion in the first quarter. In theme parks, the company had revenue of $2.1 billion from admissions and about $1.6 billion from resorts and vacations. Meanwhile, food and beverages and merchandise sales were $2.3 billion — these are likely the business units that will see the most impact. Theatrical distribution had revenue of $1.4 billion. That equates to nearly $9.4 billion of the $20.8 billion the company had in the fiscal first quarter, or almost 50% of the company's revenue is in danger. How much the total impact will be, we will have to wait and see. Analysts estimate that sales in the fiscal second quarter will be down 18% versus last year to $17.61 billion.

The big question isn't this quarter; it is the quarters going forward and what the potential impacts for the business will be long term. The company has concerns as well, entering into a 364-day credit agreement for $5 billion on April 10. Additionally, on March 26, the company issued C$1.3 billion in votes due in 2027.

Betting On A Decline

The weak outlook is likely one reason why traders are betting the stock falls sharply by the middle of May. The $90 puts for the May 15 expiration date have seen their open interest level rise by around 14,700 contracts on April 8. The puts traded on the ask for about $3.75 per contract. That means that for the buyer of the puts to earn a profit, the stock would need to fall to $86.25, a decline of about 17.1% from the stock's price of approximately $104 on April 15.

Technical Chart

The technical chart of Disney isn't healthy, and the stock has recently hit a level of resistance at $109.25 and has failed on a few attempts to rise above it. The stock is also currently finding some support on an uptrend at $102; should the stock fall below that uptrend, the shares could retrace lower to the next level of support at $92.50.

Risks

The most significant risk will be how long we stay in this coronavirus environment where theme parks and many of Disney's core operations are closed. It could be for a short period or a very long period. Clearly, the shorter the period of time, the less of an impact the company is likely to see. That means the stock could snap back considerably sooner. However, if it ends up taking a longer time, then it could prove to be even more damaging to Disney.

It would seem at this point, we may end up being in this period for a while, and until we get to a position with more clarity, the risks remain to the downside for the stock it would seem.

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This article was written by

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Designed for investors looking for stock ideas and broader market trends.

I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.

I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels. 

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.

Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.

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