Shocking, yet, not exactly surprising. If that is even possible. I was in one room, my Sunday night cram-session done for the evening. I typically relax for 30 to 45 minutes prior to heading for bed on weeknights after finishing up my prep-work for the day ahead. My wife was in the other room, watching whatever it is she watches on Sunday nights. From my room... "Hey, Pat... Disney (DIS) just canned Bob Chapek. He's being replaced by Bob Iger." From her room.... "Yes !!!" She is not a trader. She is a Disney fan.
I think nearly everyone who follows The Walt Disney Company, or American business for that matter, saw this one coming after the quarter Disney just reported. If the significantly poorer corporate execution and performance than expected had not been enough, then the delivery during that last earnings call certainly had been.
Regular readers might recall, my disbelief the next morning after during the call, CFO Christine McCarthy provided full-year guidance for both revenue and segment operating income that underwhelmed, while assuming "no meaningful shift in the macroeconomic climate", which is absurd as consensus opinion across the field of economics is for recession or at least something very close to it at some point in 2023.
Then the comment about looking forward to the next 100 years as an opportunity. It was too much after earnings and guidance that had missed so badly. Too much after this past quarter... The Direct to Consumer business had driven revenue of $4.907B (+8%), while generating operating income of $-1.474B, down from $-630M a year earlier.
Growth at the parks had been the bright spot, but even there, friends and relatives coming back from the resort area in Orlando came back not with the need to return as they had in the past, but with a feeling of having been "fleeced" or "nickel and dimed" to death. Disney vacations had always been expensive, and inflation had been a national and global reality, but that feeling of "family fun" that Disney had always sold so well, at least to my contacts, had started to show cracks.
The Deal
So, it is that former CEO Bob Iger is CEO once more at age 71. Iger had tried to retire several times during the later years of his 2005 - 2020 prior stint as chief executive, and had selected Bob Chapek for the role himself. Iger is signing on for two years this time around, and will commence soon with a new search for a more permanent successor. The shares as one might expect were up sharply overnight on this news. Disney has been under pressure to make changes as activist investors such as Nelson Peltz's Trian Partners and Dan Loeb's Third Point have taken stakes in the entertainment giant. Not all are so pleased.
Trian, whose stake is still less than 5%, is opposed to the rehiring of Iger and is currently advocating for a seat on the board to push for increased cost cutting. Third Point has gone back and forth on issues such as spinning off the contracting but still highly profitable sports programming business known as ESPN, and had for the time being settled for getting Carolyn Everson appointed to the board.
The truth is that turning Disney around will not be an easy job for Iger. What he has going for him is that he is far more popular than Chapek with Disney investors and employees. That may change if the firm continues to move on decreasing payroll. Chapek had been in a position of strength not too long ago. Even with some issues that had turned into rough spots involving intra-state Floridian politics and the poor relationship with the firm's workers, the stock had traded as high at $203 as recently as March 2021. Chapek had guided a large public-facing operation through a global pandemic. His contract had been renewed.
That strength ebbed quickly as that most recent earnings release hit the tape. The poor performance and the deterioration in the quality of the balance sheet had become too much. The stock closed at $91.80 on Friday night, down 41% year to date and down almost 55% from that March 2021 apex. Change would come before the weekend was out.
Is Disney stock a buy now? That depends on where it trades by the time most retail traders can get involved. I believe that below $100 it is, but one better be ready to trade. This name will probably be volatile for a while as Iger makes changes and those changes make headlines. DIS closed at 22 times forward looking earnings last week and in late 2022, 22 times is expensive. At least there should be a honeymoon period.
Elsewhere...
Global equities tended toward weakness very early on Monday morning as did the major US equity indexes in response to surging Covid infections in China as well as the three Covid related deaths there. These are the first Covid deaths reported by Beijing in more than six months. The global fear, economically... is that China will shy away from the playbook laid out earlier this month meant to aid local governments in taking a targeted and less strict Covid-Zero approach toward dealing with the virus.
The Week Past
Markets over the past five sessions could be described as "choppy". From an economic perspective, the macro released was just as choppy. First off, investors rejoiced as a cooler than expected October PPI hit the tape, confirming that month as a potential turning point for inflation across more than one level. However, October Retail Sales were far stronger than economists had projected, while October Industrial Production slipped back into contraction after a one month reprieve, and fell short of expectations while doing so.
Further muddling the picture, November manufacturing surveys out of the New York and Philadelphia regional Fed districts contradicted each other as New York showed surprising expansion that no one foresaw and Philly shocked economists with a far worse headline result than anyone saw coming. The Philadelphia district is arguably the nation's most important region for the manufacture of goods.
In addition to the data, our central bankers sounded just as confused. Vice Chair Lael Brainard opened the week sounding dovish on policy only to be followed by a lineup that included San Francisco Fed Pres. Mary Daly, Kansas City Fed Pres. Esther George, Cleveland Fed Pres. Loretta Mester and St. Louis Fed Pres. James Bullard. These speakers all sounded anywhere from somewhat hawkish to very hawkish with Bullard leaning on the Taylor Rule for guidance on rates after it seemed that the Fed had long ago abandoned its use. Minneapolis Fed Pres. Neel Kashkari closed the week sounding rather non-committal.
The major indexes for the most part, gave up some ground last week, but not big, chunky ground. In fact, Friday produced an "up" day. We remind readers that despite the sort of soft performance for the past week, that the "tradeable" bottom that was put in on October 13th and had been confirmed on October 21st is still very much intact, especially after the reconfirmation of November 10th.
Across our marketplace... The S&P 500 rallied 0.48% on Friday, closing down 0.69% for the week. The Nasdaq Composite gained 0.01% on Friday, (which is no misprint, the Nasdaq 100 actually finished Friday perfectly flat) and down 1.57% for the week. The Russell 2000 gained 0.58% on Friday, while surrendering 1.75% for the week. Then, there is the Philadelphia Semiconductor Index, which I always keep an eye on as this group has been the engine of both the economy and the markets... This index gained a very modest 0.18% and backed up 1.12% for the week. Remember, the SOX gained 14.87% the week prior.
Nine of the 11 S&P sector-select SPDR ETFs shaded green on Friday, while only three of the 11 funds ended in the green for the week. Losses were for the most part, moderate or pedestrian across Wall Street last week. However, defensive sectors outperformed everything else over the past five days and rose to the top. Defensive groups took the top three places for the week led by Staples (XLP) , Utilities (XLU) and Health Care (XLV) as those three funds all gained for the period at least 1%. Discretionaries (XLY) suffered the greatest beatdown at -2.83%.
According to FactSet, the S&P 500 now trades at 17.2 times forward looking earnings, up from 17.1 times one week ago. This ratio remains significantly below the S&P 500's five year average of 18.5 times, but now enters the new week having caught up to and surpassed its five year average of 17.1 times.
The Week Forward
This week will be a holiday shortened week for our marketplace, with trading closed completely in the US on Thursday for Thanksgiving, and a 13:00 (1pm) closing time on Friday at both the New York Stock Exchange and Nasdaq Market Site. The bond market will close at 14:00 (2pm) as well on Friday. What that means is that really anything that government agencies need to release in terms of macro-economic data and any quarterly corporate earnings set for release will have only three real days this week to get it done.
As far as earnings, there are still a few key names out there. With 94% of the S&P 500 in the books for the season, according to FactSet... 69% of S&P 500 companies have beaten earnings expectations, while 71% have beaten on revenue generation. The rate of year over year earnings growth for the season has been 2.2% on revenue growth of 10.8%. This leaves estimates for full year growth at 5.2% for earnings and 10.5% for revenue.
As far as the macro is concerned, the focus of the week will be the October Durable Goods Orders to be released this Wednesday. In addition to that, October New Home Sales will post that same day. Fed speakers may and probably will steal the show this week as Mester, Ballard and George, all mentioned above as policy hawks, will speak publicly on Tuesday ahead of the FOMC Minutes of the November 2nd meeting on Wednesday afternoon.
This morning futures markets trading in Chicago are pricing in a 76% probability for a 50 basis point increase to be made to the target range for the Fed Funds Rate on December 14th, with a 50% probability for another 50 bps rate hike on February 1st, 2023. Those same futures markets are currently pricing in a terminal rate of 5% to 5.25% (up from from 4.75% to 5% last week at this time) that will not be reached until March and will then stick through September.
There is nothing due on Friday. This Friday is "Black Friday" which unofficially kicks off the holiday shopping season and is followed by "Cyber Monday'' at the other end of next weekend. A number of retailers, Target (TGT) immediately comes to mind, are going to need to get the season off to a good start. That said, many analysts are now projecting that a majority of US consumers are likely to spend less this holiday season than they had a year ago.
As for individual companies reporting this week, there are several notables set to go to the tape with their numbers. Such names as Zoom Video (ZM) , Analog Devices (ADI) , Best Buy (BBY) , Dick's Sporting Goods (DKS) , Medtronics (MDT) , and Deere (DE) will report throughout the week.
Economics (All Times Eastern)
No significant domestic macroeconomic data-points scheduled for release.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (SJM) (2.19), (J) (1.77)
After the Close: (A) (1.39), (ZM) (.84)
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