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Disney (DIS) Earnings: A Trader's View

Disney - Shutterstock photo
Credit: Shutterstock

As a rule, I don’t do previews of specific companies’ earnings. I leave that to Richard Saintvilus, who does an excellent job of it in his regular breakdowns of earnings expectations. However, there are times when there is a storyline that will emerge from an earnings report and/or a trade opportunity that I find just too compelling to resist. Disney (DIS), which reports after the closing bell today, has both.

The storyline is about what the company will look like on the streaming and broadcasting side going forward. They have announced that they intend to increase their stake in Hulu by buying the 33% stake currently owned by Comcast (CMCSA), but there has also been talk for a while of them spinning off or selling ABC and ESPN. Those seem like contradictory actions. Increasing ownership of Hulu indicates a commitment to streaming, while divesting ESPN, which forms an important part of Disney’s successful streaming bundle, sends the opposite message.

This afternoon, investors and analysts are hoping to hear more about Disney’s long term plans in that regard and it is that, rather than the raw numbers, that are expected to move the stock after the earnings release and the earnings call, which is scheduled for 4:30 pm. That expectation has created a situation where it is hard to see Disney saying anything that will produce a big negative reaction in the stock. If they do indeed say something, it will probably be because a deal has been reached for Comcast’s Hulu stake. With the price for that stake, according to Richard's piece this morning, being potentially below what analysts believe it is worth, that would be a positive for DIS.

Or maybe they say nothing about that and announce plans to spin off some of their broadcast portfolio. That is something that analysts and investors have been screaming for for a while, so that would be seen as positive too. The third option is that they say nothing about any of that and concentrate on last quarter’s earnings. That is where the risk is, as disappointment in no announcement could cause an initial drop in the stock, but there is a potential upside to that too: Non-broadcast earnings have been relatively strong, at least in terms of profitability. What we have heard from payment processors, airlines, hotel groups and others this earnings season so far indicates that consumers are still spending freely on experiences, even if they are cutting back elsewhere, something that should benefit DIS.

That means that two of the three likely scenarios are positive for the stock, with the third still having a chance to recover from any initial negative reaction. Then there is the positioning and mood of the market:

DIS chart

DIS has been under pressure for some time. The stock lost around a third of its value from the high achieved in February to the low in October. It has bounced back a bit since, but is still down year to date, a period during which the S&P 500 has posted decent gains. As Richard mentions in his piece, that has led to many analysts seeing it as undervalued at around 17 time earnings, so people will be looking for reasons to buy.

On balance, and given the market’s generally bullish mood right now, there is more chance of a positive reaction in DIS this afternoon than a negative one. Trading is about identifying situations where the odds are in your favor, while recognizing that there is a potential downside and preparing for that possibility, so buying DIS in front of earnings looks like a risky, but worthwhile trade. It is, however, a trade, not necessarily a long-term investment.

There is no doubt that Bob Iger, the recently returned Disney CEO, faces challenges. The company has become a sprawling behemoth and needs to rationalize, which is always a challenge. If he articulates a clear plan for that rationalization this afternoon, the stock could go on a sustained upward run, but if he does not, it will drop significantly and quickly. That is why long-term investors may prefer to wait until after earnings before deciding. However, those with more of a trading mindset should consider buying DIS before earnings with a stop loss in place, and a view to taking some profit and holding a balance for the long-term if things work out.

Disclaimer: The author has initiated a long position in DIS this morning.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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