Walt Disney Co (DIS) Stock Could Fall To Sub $100 Levels Once More

The optimism around Disney stock is too much right now. Things don't look as good in the long term. Here's why.

Sentiment levels for Walt Disney (NYSE:DIS) are at all-time highs and for good reason - the company smashed the $3 billion per year mark in studio revenues. Rogue One, Finding Dory & Captain America: Civil War were the stars of the show reeling in over $1.3 billion in revenues between them. I was decidedly bullish on Disney a couple months back when the share price stooped to around $90 a share. The main reason for the poor share price performance up to that point was the company's poor ESPN performance, although revenues in this division have stayed buoyant (due to advertising rates) despite meaningful fall in subscriber levels.

However, the street seemed to value this stock differently when Disney announced its fiscal fourth-quarter results last November. Up to the fourth quarter, the stock was getting hammered due to poor performance in media despite strong studio performance. Nevertheless, revenues climbed to $55.632 billion in fiscal 2016, and strong growth is expected for the next few years. Therefore value investors decided to step in a few months back and have been handsomely rewarded. The question that remains now is if this rally still has legs. I'm not so sure and would be recommending that investors take some profits off the table. (See Also: Can Walt Disney Co (DIS) Stock Rally Despite ESPN Woes? )

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Source: Sentimentrader.com

Disney Is Beginning To Narrow Its Film Range By Concentrating Only On Blockbusters

The risk I see with Disney's studio division going forward is that it is becoming very reliant on both the Star Wars franchise, as well as the Marvel franchise. Further, four Star Wars films are set to be released by 2020, which illustrates Disney's intentions to keep piggybacking on the franchise's success. I don't feel that the loss of Carrie Fisher will be a main issue but the lack of diversification across its studio franchises could enable competitors to gain market share here. At present Lucasfilm and Marvel are doing excellently, but will it last, especially, when you consider that many films in this space will be sequels? Disney is banking on interest not waning in its blockbusters. This heightens the risk and of course the reward respectively.

Disney's Valuation Has Come Back In Line With its Historical Numbers

In terms of the company's valuation, the stock is currently trading at an earnings multiple of 18.95 which is slightly below the company's 5 year average of 19.6, but above its 10 year average of 17.7. So on a historical basis, the share price of around $108 looks fairly valued here. The company is still expected to grow its top line by 4% in fiscal 2017 which CEO Bob Iger calls an anomaly. In 2018, the studio division is expected to add to sales meaningfully, especially, Marvel which is projected to come out with four superhero films in fiscal 2018. The question that remains is how much future growth is priced into the stock at present. I believe there is a lot and although Disney has strong competitive advantages, its media networks segment still hasn't convinced the market about its long-term growth aspirations. Furthermore, revenues for Disney's resorts and studios segments remain at risk if disposable income levels decrease through persistent rising interest rates.

Also Read: Disney Stock: Should You Buy Walt Disney Co (DIS) Stock In 2017?

Selling Covered Calls (12 Months Out) Has The Potential To Quadruple Annual Income

I believe the best course of action for investors at present would be to take some profits off the table or sell some covered call premium to enhance the dividend yield. For example (with Disney paying a paltry 1.46% yield), one could sell the Jan 2017-$115 call for $540. Assuming we are talking about 100 shares and $115 was not breached by this time next year, the investor's income would rise to ( $154 - dividend payouts + $540 - covered call premium = $694 ). This (based on January 3, 2017, share price) gives the investor an annual yield of approximately 6.5% which is more than four times the present dividend yield. By adopting this strategy, one has to be prepared to lose their shares if that condition arises. However, you are getting paid to take out that contract and remember $115 is 8.5% above its January 3rd, 2017, share price. Food for thought, especially for income orientated investors.

Summary

To sum up, Disney stock has had an impressive run-up lately but I don't see it lasting. The company's valuation has come back to former levels and fiscal 2017 is expected to have muted growth at best. Furthermore, more risk has been added to the table in my opinion by really narrowing the audience of its upcoming films. Past success is not always an indicator of future growth. I believe you will see Disney sub $100 once more.

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