Unfortunately I did not pull the trigger when Disney's (DIS) stock ramped up to over $115 (in response to its better EPS report) as I said I would in yesterday's update.
I just couldn't complete my analysis fast enough to make the right judgment.
Here was Tuesday's update:
* I would reshort any move towards $115 for this much beloved entertainment company
Disney was placed on my Best Ideas List (short) at $116.25/share. The stock has been on my List for the longest period of any other equity (either long or short) - having been put on in November, 2015, more than three years ago.
I have made 4-5 core investment shorts in this name (mostly in the mid $110s) - and have done quite well in doing so as I have covered materially lower than the current share price of about $112.
The entertainment giant will likely meet or slightly exceed 1Q2019 expectations when it reports after the close Tuesday - and I would short any move towards $115 (as I have done in the past). The Orlando theme park will likely beat, advertising should exceed consensus (football a +) and cord cutting might have stabilized.
However, looking beyond the extra week in the fiscal year, a potentially strong film slate, the Star Wars Galaxy Edge launch (this Summer at Disneyland and later at WDS-Hollywood Studios), for this year there are a number of continuing concerns:
* Rising digital losses, increased spending and execution risk in streaming could weigh against the market opportunity
* ESPN distribution renewals (Hulu investment could dwarf Disney+)
* Vulnerability (demand elasticity to sky-high admission prices) of theme parks to a general economic downturn (and we are late in the economic cycle)
* Peak film content this year
* Likely years of margin pressures (due to new business costs/investments), growing cyclicality and slowing EPS growth relative to history and relative to expectations
Disney's least squared earnings per share growth rate is falling precipitously -- to only +5% to +8% per year.
At 17x forward 12 month EPS, Disney appears overpriced relative to its projected (slowing and more cyclically sensitive) earnings growth rate.
There was nothing in the Disney release that changes my ursine view of the shares.
The issue to investors is not whether Disney beat consensus expectations -- it did.
Rather, over the next few years Disney is trying to "build a better mousetrap" with the introduction of its direct-to-consumer streaming business.
Like it or not, Disney is embracing the capital-intensive Netflix (NFLX) strategy.
1. The streaming strategy poses execution risk and will likely be a drag on earnings for many years at a time in which the company's leverage has increased (due to the Fox (FOXA) deal).
2. The entertainment company will have to balance the large capital commitment to streaming with the potential loss of the traditional revenues that it receives from other streaming services.
There is also a leadership issue. Bob Iger has extended his contract three times and he is in the waning period of running Disney. Kevin Mayer (who runs the direct-to-consumer business) and Peter Price (who will come from Fox) are likely candidates.
I would continue to avoid being long Disney's shares.
(This commentary originally appeared on Real Money Pro on Feb. 5. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)