After digesting Disney's ( DIS) results I have concluded that I want to re-short the shares. (My short "level" is $140/share or above and my 12 month price target is $120/share).
There is no more universally loved company or stock than Disney - which has been the target of my negativity on and off over the last three years. (My investment thesis is here)
That analytical conclusion was profitable - and I made sizable profits in several short trades over time based on a lengthy short thesis. In fact, in a generally rising equity market Disney was a notable laggard in 2017-2018.
Not so much in 2019 when visions of sugarplums and streaming squeezed the shares higher and forced me to cover for a loss.
That "Group Stink" of optimism over Disney's streaming future (and launch of Disney+) has been conspicuous over the last few months.Last night the company's EPS missed by a full $0.27 to consensus expectations and came in at only $1.35/share. Almost all of the miss was from the acquired Fox biz which cost Disney of close to $0.60 compared to the guidance of $0.35 EPS dilution. The EBIT miss was a startling -$600 million relative to guide.
Excluding Fox, Disney reported +3 to +4% organic growth in EPS.
Looking to the next quarter the FOX EPS dilution will rise relative to expectations and cause a drain of about $0.45/share. Core Disney will be less than expected as well as Media Nets EBIT will be lower (ABC/ESPN is expected to be quite weak at almost -10% year over year, ACC launch costly and lower Netflix revenues). EBIT (ex-FOX) will be flat.
Street estimates will generally decline. Some will reduce the 2019 forecasts by as much as $1.00/share (to under $5.50) and for 2020 by $0.35-$0.40/share for next year (to $6.10-$6.15).
Fiscal 2020 could be even weaker - this will depend upon further shortfalls at Fox, the rising cost of content, expenses associate with the launch of Disney+ and whether the recent network weakness causes advertising revenues to draw down further. (Given the expected moderating trend of the U.S. economy I would expect more downside profit risks than upside potential).
Since FOX has been so dilutive out of the gate, one should apply a healthy skepticism towards Fiscal 2021 EPS projections by management and the analytical community (when FOX was expected to be accretive).
The prior strong execution of Disney's previous acquisitions resulted in investors and analysts giving Disney the benefit of the doubt going into the earnings report.
However the FOX execution out of the gate raises far bigger questions as to the company's likely limited profit progress over the next few years - that period of weak growth was one of the core reasons why I (prematurely) shorted DIS earlier this year.
At 23-4x next year's calendar EPS and at 16x EBITDA, I don't think investors will be as patient as they were leading up to the quarter.
To some, Disney is now a "show me" stock.