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Magical Quarter for Disney Despite View for ESPN?

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November 5, 2015
Earnings trends for Walt Disney Co. in view of ESPN.

Walt Disney Co. (DIS), a monster of media and entertainment, is up next with quarterly results as media companies tag along the end of the earnings parade. Despite Wall Street’s mostly high hopes for DIS’s fiscal Q4 performance, some analysts and investors appear to be rethinking the sector’s cable vulnerability after Time Warner (TWX) warned that its profits wouldn’t meet expectations in the next reporting quarter.

DIS shares fell sharply in step with TWX’s selloff on Wednesday. Still, bulls apparently hope that diverse Disney can produce a little magic with the bottom line when it reports after the bell Thursday. Analysts reporting to Thomson Reuters expect DIS to turn in revenue that’s 9.4% higher from the year-ago period at $13.55 billion. They anticipate earnings per share to be up 32.5% to $1.14 a share.

ESPN Scrutiny

The blue-chip stock suffered a drubbing after its August earnings call when top executives tempered future expectations for ESPN. The cable-sports network is a known cash cow in the media segment that has long been DIS’s most profitable division, according to company data. At that time, DIS reported a “modest” decline in ESPN results as subscribers began to “cut the cord.” That’s industry speak for a growing consumer movement away from traditional and cable television to online streaming or a la carte viewing.

DIS said then it’s putting the brakes on some media spending—ESPN cut 4% of its workforce—and is creating products that some industry analysts believe may help it better compete. One is DisneyLife, the “over the top” cable service it introduced in the U.K. but has yet to produce early figures for review. Disney was also quick to point out other segments are gaining traction to become bigger contributors to both the top and bottom lines, including films, resorts, and theme parks. The newest theme park, in Shanghai, has an opening slated for 2016, so it will be interesting to see how Disney comments on the Chinese economy.

Wall Street is looking for more chatter around the much-anticipated release of “Star Wars: The Force Awakens,” which comes out in December. Movie industry analysts are projecting Star Wars may break records at the box office. And those sales don’t include all the peripheral ammunition from toys, games, licensing, not to mention the Star Wars version of Space Mountain that the company said it would open in Disney parks after the movie hits the big screen. Let’s see if the company offers insight when it reports later today.

Disney stock chart

FIGURE 1: HOLD THE PARADE?

Notwithstanding the some 26% nosedive in the stock price in August, DIS has recaptured nearly 19% year to date, even with Wednesday’s retreat. What’s next? Data source: Dow Jones. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Stock and Options Action

At this point, short-term options traders are pricing in a potential 5% move in either direction for the stock around earnings, according to TD Ameritrade’s thinkorswim® platform’s Market Maker Move indicator. That could indicate that fewer traders are expecting the Magic Kingdom to come out with news that will rock the stock, even though DIS has beat Street expectations for 11 straight quarters.

Implied volatility is in the middle of the road at the 55th percentile.