(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of DIS.)
The Walt Disney Co.'s (DIS) stock performance over the past year has been anything but magical, with shares rising by about 4% versus an S&P 500 that has increased by 14.5%. Traders now see the stock playing a bit of catch-up and expect the stock to rise by about 6% by the middle of September.
Analysts are forecasting for the company to see earnings growth of nearly 25% when it reports quarterly results in August. That bullish outlook is one of the reasons why traders may be looking for the stock to rise over the short term. But the company is in hot pursuit of closing a deal to acquire assets from Twenty-First Century Fox Inc. (FOX), while also rolling out a direct-to-consumer streaming media service, which could both act as a longer-term catalyst for the company.
Options traders are betting shares of Disney will rise by expiration on Sept. 21 based on the betting at the $105 strike price. The number of traders betting shares will increase outnumber the bets the stock will fall by a ratio of 3 to 2, with 6,500 open call contracts. But the bullishness grows at the $110 strike price, where the number of open calls jumps significantly to over 17,000 open contracts. For a buyer of those calls to at least break even, the price of the stock would need to rise to about $113.10, a rise of about 6% from the current stock price of $107.20. It is a sizeable bet as well, with the value of the open contracts at roughly $5.3 million.
Strong Growth in 2018
The bulls are likely betting on the robust growth expected this coming quarter and for the full year. Analysts see earnings climbing by about 25% in fiscal 2018. One reason why traders may only be looking for just a short-term gain in the stock is that the earnings growth is expected to slow materially in 2019 and is seen rising by about 9%.
Valuation Is Cheap
A lot of that slow growth may already be priced into shares of Disney with the stock trading at just 14 times 2019 earnings estimates, well below the S&P 500's forward P/E ratio of about 17. In fact, Disney's valuation is at its cheapest valuation since 2014.
Looking to the Future
But the slowing growth could all change in the coming months, as the company attempts to transition itself and generate new revenue streams with its new direct-to-consumer streaming service and its pending acquisition of assets from Fox to help bolster its content library.
If Disney's new ventures work out, it may take the short-term optimism and transform it into something longer-term.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. 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 performance.