Look out below!
Disney (DIS) took a header yesterday. I’ve written about these moments before for various high-quality stocks. Inevitably, every year like clockwork the stock markets decide to put high quality businesses on sale in an overreaction to this, that, or the other. The reason for Disney’s 9% nosedive was a falloff in top lines from analyst expectations and fear for their cable revenues. Utter nonsense.
Last time I checked Bob Iger was still running the place. This man cut his teeth at Capital Cities and is as gifted as they come in the media executive space. Just look at his track record since taking over. By fully capitalizing on the cheap-money era, Iger has guided Disney into 3 of the smartest acquisitions that could possibly be conceived. They picked up Pixar, Marvel, and Lucasfilm. These 3 properties will generate tens of billions in licensing revenues and over the next couple of decades will have cash flowed billions of dollars with all the ways the IP can be distributed. And because this quarter only saw $13.1B in revenues as opposed to an expected $13.2B, Disney is somehow 10% less valuable in a single day? Weighing and voting, weighing and voting.
Disney is a high-quality choice for a long-term addition to a retirement portfolio. It generates immense amounts of free cash flow and possesses arguably the most recognizable portfolio of multimedia assets in the world. I’m a fan of the company’s tremendous cash generating abilities, however, even after the 9% drop today they are still richly valued by virtually any standard utilized.
What needs to be ascertained is whether the move down was the beginning of a stronger move lower or an overreaction? Is yesterday’s selloff an opportunity to add to a portfolio? How ripe is a snapback trade, potentially?
Let’s look at the facts about Disney’s fiscal Q3 results. They beat on earnings which were up 13% from Q3 in 2014. The YoY revenue comparable from end of Q3 2014 to end of Q3 2015 saw a 5% rise in topline, despite analyst projections. Who cares about Wall St. analysts? They are literally paid to miss the mark and then sell their misses like it’s valuable knowledge to the investing world. For the nine months ending, revenues and earnings are also up nicely. Free cash flow is down quarter over quarter but still up for the nine months ending over last year so I wouldn’t be surprised to see another year of over $6B in free cash flow.
One of the major worries about Disney is the falloff in broadcasting revenues and how they can adapt ESPN’s model to the cord-cutting trend. My stance is who cares? Is it really worth worrying if Iger is going to figure out how to fully monetize ESPN and the other broadcast assets in light of the shifting environment for cable revenues? The answer is no because Disney is just milking the current model for all that it’s worth. They’ll adapt with the cultural and secular shifts in consumer trends and continue to generate incredible income from their broadcasting portfolio for years to come.
A gambler may want to consider playing the snapback with an aggressive option strategy as asset managers potentially step in to buy Disney shares in what could be perceived as an overreaction by Mr. Market. However, breadth has been severely deteriorating underneath the market. Additionally, AAPL may have set an example for what may occur. Observe the chart below.
Despite the current VIX reading, there is a lot of fear in the market. Sentiment readings have made it palpable. Now you have two mega-sized conglomerates showing incredibly weak market action. Is the price action of AAPL and DIS a precursor to something larger? Something of the summer of 2011 variety? Hell, I don’t know. Who does? If you want some actionable advice, I’d say do what the pros do and wait for confirmation. Trying to trade in front of a trend change has depleted the bank roll of many a trader. If you want to trade the potential of a snapback without waiting then I’d suggest keeping a tight stop on whatever medium you use. For longer term allocation, if you liked DIS at $120 but were waiting for a better entry, well then I’d say a quick 10% haircut is a better entry. Remember, DIS is richly valued right now and rightfully so in light of their IP and cash flows.
There are plenty of ways to gamble long or short on the current price action in Disney, hopefully making traders dreams come true.