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May 15, 2017

S3 Research: Disney Short Interest Nearing 5 Year Low

The Walt Disney Co. (Dis US) is the most shorted security in the Movies and Entertainment sector, with over twice the number of shorts as the runner-up Time Warner Inc. (TWX US). The overall Movies and Entertainment sector in the U.S. has $6.05 billion of total short interest, of which over a quarter is DIS. Over the last month the sector saw $553 million in short covering, 87% was in DIS.

DIS released disappointing 2nd quarter earnings on May 9th with overall revenues of $13.34 billion missing estimates by $110 million. Only two divisions, Parks & Resorts and Studio Entertainment, beat estimates. DIS stock price is down over 5% since hitting a recent high of $115.84 on April 27th, a level it has not seen since November of 2015.

Although Disney’s overall revenues and operating income continue to increase every year, its Cable Networks division, which includes ESPN and the Disney Channel, saw an actual year-on-year decline for the first time since 2002. Cable Networks was previously the star of Disney’s diversified mass media and entertainment portfolio and contributed 59% of its operating income in 2010, but now contributes less than 43% to Disney’s bottom line. ESPN is undergoing extensive cost cutting to offset increased live-sports production costs combined with a drop of over 9 million viewers in the last three years. The Disney Channel’s ratings weakness also continued its over 3 year slump with cable ratings falling 18% in 2016. 

DIS short interest peaked at $6.7 billion in November of 2015 after DIS’s stock price hit a historical high of $121.69 in August 2015. Short interest continued to tumble in 2016, declining $3.04 billion, or 58%, to $2.2 billion by the end of the year. As shorts bought to cover their open positions, they were also locking in profits as they were up $277 million in mark to market profits, on an average short position of $3.7 billion, for a return of 7.5%.

Short sellers continue to cover their position in 2017, with short interest down to $1.68 billion, a decrease of $507 million, or 23% for the year.  Instead of locking in profits, shorts are realizing losses in 2017. Short sellers are down $122 million in mark to market P/L in 2017, on an average short position of $2.0 billion, for a return of -6.1%.

Even with ESPN being a near term revenue and operating cost wild card, short sellers continue to reduce their Disney exposure as its Studio Entertainment and Parks & Resorts provide ample revenue growth to offset any Cable Network hiccups. DIS short interest is down $193 million, or 10%, in May. If short covering continues at this pace, DIS short interest will hit the $1.5 billion level, which last happened in early 2012 when DIS stock price was one year into an almost 4 year rally, which saw its stock price appreciate by over 300%.

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Head of Research, S3 Partners
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