5/12/2016
By Charles Payne, CEO & Principal Analyst

It's funny how some distance
Makes everything seem small
And the fears that once controlled me
Can't get to me at all!

It's time to see what I can do
To test the limits and break through
No right, no wrong, no rules for me I'm free!

Let it go, let it go

Disney Corp posted earnings that came in shy of consensus for revenue and earnings per share, and the stock is caught in a blizzard of selling.  In many ways, it’s remarkable because the company is a force of nature and has overcome obstacles and limits in the past. 

Segments

The main focus on Disney has been on its cable properties in general, but ESPN in particular.  The sports channel that began life airing Australian Rules football seems to have all sports covered.  Such a breadth of coverage is expensive.  In the meantime, cable has been under assault from other viewing options that are growing in popularity, especially among millennials.  The cord-cutting revelation is real, but the pace and ultimate carnage is widely exaggerated. 

Be that as it may, until the industry fights back with plans that assuage doubters and mavens, worst-case assumptions will rule the day. 

Cable revenue was $3.95 billion, down 2%, but operating income improved by 12%.  ESPN aired only one College Football Playoff game versus seven in the comparable period last year.

Broadcast revenue was $1.83 billion, up 3% but operating income was down 8%.

Solutions

There is no doubt the company has to find solutions that go beyond so-called skinny bundling to a direct to consumer model or ala carte option.  The question is pricing and delivery, but will be worked out?

Parks remain popular, with the Chinese version a huge success.  Moreover, there seems to be pricing power to mitigate slower periods of attendance.  This is a solid business with room to grow.

Conclusion

The company is a victim of its own success, but still has to convince investors it has the answers.  On that note, I think management has to be more proactive on communications and also make moves that keep pace with technology that is changing the way consumers view and interact with media and entertainment.  I would also like to hear more on succession.

The stock isn’t cheap per, se but there is no urgency for value investors to buy shares.  The chart shows shares tumbling after forming a perfect double top in 2015, and now, must hold above $100 or it could be vulnerable to $95.00 even $90.00.  That said, I think the stock is oversold already and the street is being too critical.  That means a long term investor should consider riding out near-term volatility.

For traders, a narrow range between $100 and $106 might be tradable, but I feel more confident buying the stock going through $106 on better-than-average volume.

Charles Payne
Wall Street Strategies

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