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Betting Against Disney Is Popular and Dangerous

By Rick Munarriz - Sep 30, 2015 at 12:05PM

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Short interest is growing at the family media giant.

Source: Rick Munarriz.

On a scale of Snow White and the Seven DwarfsDisney (DIS -1.11%) investors have gone from Happy to Grumpy. Disney stock has surrendered nearly 20% of its value since peaking last month, and bears are starting to put more money where their naysaying mouths are.

There were 64.5 million shares of Disney sold short as of mid-September, the highest level of bearish activity for the media giant in more than a year. Short interest clocked in at just 38.4 million a year earlier. 

The pessimism has been brewing in recent weeks. Short interest didn't top 45 million until last month, and it's easy to see why if we dive into the family magnet's poorly received fiscal third-quarter results.

Revenue growth decelerated, posting a mere 5% year-over-year advance for the June quarter. That's the weakest top-line gain in two years, according to S&P Capital IQ data. 

The dagger in last month's report was the admission that ESPN experienced a sequential dip in subscribers during the quarter. Investors figured that ESPN would be immune to the problematic movement where millennials are cutting the cord, replacing traditional cable and satellite television service with cheaper streaming platforms. The immediacy of live major sporting events was supposed to make ESPN immortal, but now it's starting to seem pretty mortal. As the most expensive channel for subscribers outside of the premium movie channels, ESPN has a lot to lose -- especially since it has long-term contracts with many of the leading leagues with programming costs that move higher with every passing year.

As diversified as the House of Mouse may be, its media networks division accounted for 45% of the revenue and 54% of its segment operating profit through the first nine months of the fiscal year that just ended. 

It's not just a matter of there being nothing good on TV at Disney. Its theme parks segment -- Disney's second-largest business -- grew even slower, posting just a 4% increase in revenue since the prior year. The timing of the Easter holiday factored into that weakness, but even if we look out at year-to-date results to smoothen out the Easter shift, we still find Disney theme parks, timeshares, and cruise lines checking in with only a 6% top-line boost. 

That may paint an unflattering portrait of Disney for investors, but then we can turn our attention to the promising future. We all know that Star Wars: The Force Awakens will be a big hit in December, but that's an event that's already sending ripples through its consumer products and theme park divisions. Ambitious theme park expansions are in the works, though most of those moves will take years to play out. So, yes, there are a lot of people hating on Disney these days, but that's only because it's Sleepy. 

It'll wake up. It's not just the Force that's awakening.


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