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Sep 21, 2017

S3 Analytics: Disney is Not The Most Magical Stock in the S&P

The Walt Disney Co.’s (DIS) short interest increased by $696 million over the past month as CEO Bob Iger’s comments at the BofA Media, Communications & Entertainment Conference sparked a 4.4% drop in Disney’s stock price as it hit its year-to-date low of $97.06 on September 7th.  Iger revealed that 2017 EPS would be in line with 2016 results instead of the 3% increase that analysts had been expecting and drastically below Disney’s EPS growth of 17.8% since 2010.

Disney recently announced that they will be terminating their content streaming agreement with Netflix Inc. (NFLX) but their content portals, an additional revenue stream,  will not be going live until 2018 (ESPN App) and 2019 (Disney & Marvell App). Disney’s 2017 revenues were negatively affected by ESPN’s large sports content expenses, including the apparent overpayment for NBA broadcast rights, and a weaker than expected box office with Pirates of the Caribbean, Beauty & the Beast and Cars 3 not meeting expectations. Disney is hoping that late season releases of Star Wars: The Last Jedi and Thor: Ragnarok will resuscitate a weak movie year. One Disney bright spot was their parks business, which Iger characterized as “tremendous”. Iger sees a more profitable 2018 with more impact movies, including two Marvell and one Star Wars franchise instruments, lower sports content expenses at ESPN and continued park and cruise strength.

Bob Iger sees a turnaround in Disney’s fortunes in the near future, but short sellers are loading up their Movie & Entertainment sector short exposure, especially Disney stock. Total short interest in the Movies & entertainment sector is $7.7 billion, up $1.7 billion, or 29%, for the year. Most of that increase occurred recently, with an increase of $1.15 billion in the last thirty days.

Disney is definitely the short sellers pick in the sector, with $2.7 billion of short interest, which is over three times as large as 21st Century Fox Inc. (FOXA) in a distant second place.

After Bob Iger’s comments at the BofA Media, Communications & Entertainment Conference, 21st Century Fox’s and Time Warner’s (TWX) stock prices dipped along with Disney’s but rebounded higher over the next month. Short sellers are keeping their positions in anticipation of further weakness in the stocks for the rest of 2017. Disney’s increase in short interest has made it the 23rd largest equity short in the U.S. market, and by far the largest short in the sector. Disney’s $696 million increase in short interest over the last month was the fifth largest increase in the U.S. market. Short sellers seem to be rushing to get short exposure in the stock, expecting near term price weakness and continued downward price trend that began in May. There is more than enough Disney stock to borrow if short interest continues to climb and gets anywhere near Disney’s historical high of $6.7 billion of short interest in September 2015. Disney stock borrows are trading at general collateral levels, the cheapest fee or the easiest to borrow stocks. 

Want deeper insight into the above analysis? Contact: 
Managing Director Predictive Analytics, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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