There's an iconic U.S. company in trouble right now. This major player on the international stage symbolizes the American dream to many around the world. However, if you own this stock, now is the time to sell your shares.
Launched in 1923, the company owns the world's largest media company and one of the globe's top providers of family travel and leisure experiences.
If you have not guessed it, I am referencing Walt Disney Company (NYSE: DIS). Disney is a monster corporation with over $56 billion in revenue and a massive market cap of nearly $150 billion. Headquartered in Burbank, California, this global entertainment powerhouse has operations in over 40 nations and has become a symbol of the United States.
As a member of the Dow Jones Industrial Average and the S&P 500, nearly every financial institution or individual passive index investor has exposure to Disney stock.
This widespread ownership has paid off for investors in Disney over the years. Shares rocketed from trading in the teens in 2009 to just over $120 per share in mid-2015.
Since reaching those lofty highs, the price has given back nearly 18% over the last 52 weeks. Storm clouds have started to gather on the shares of this once must-own company.
If you own Disney shares, it is time to seriously consider taking your profits. Here's why:
Follow The Big Money
I like watching and following what the big money players and hedge funds are doing in the market.
Back in August, I noticed that Goldman Sachs Hedge Fund Trend Monitor publication had Walt Disney listed as a major short holding. There was $3.5 billion of short interest in the shares resulting in a full 2% of the float being short! Today, Disney is the 9th most shorted stock in the Dow Jones Industrial Average.
Whenever there is consensus opinion like this among money managers, it makes sense to dig deeper.
The Decline Of ESPN
The primary bearish pressure is on Disney's ESPN network. Once a cash cow for the company, the network has been dragged down by changing consumer trends to become a significant cash-drain.
ESPN is a sports broadcasting network reliant on the popularity of spectator sports to survive. Recently, spectator sports' popularity has been dropping. For example, in September, the viewership of NFL games in the critical 18-49 demographic plunged 14% during prime time. The Olympics fared even worse, with a viewership decline of nearly 30% last summer. Even more tellingly, ESPN has lost almost 10 million subscribers over the last three years.
To make matters worse, ESPN is on the hook for $15 billion for NFL broadcasting rights and $7 billion for college games. Provided these huge numbers, it makes sense that ESPN is a large revenue maker for Disney. The latest figures show that ESPN accounts for 75% of the Disney's cable revenues and an astounding 50% of profits per Fortune Magazine.
The forces that are causing the ESPN viewership decline go far beyond sports. As ESPN is the most expensive network for cable carriers to broadcast, it will likely be hit the hardest by the changing market.
Simply stated, the traditional cable TV bundle has become irrelevant. In the age of media fragmentation, it is unlikely that the ESPN model will be able to fight its way back to growth.
Barclay's analyst Kannan Venkateshwar explained, "In a secularly fragmenting media environment, ESPN is the most exposed. This is because ESPN's business model depends on the cross subsidy of the pay TV bundle. Consequently, given ESPN's fixed cost structure and variable revenue model, subscriber losses are likely to have a disproportionate impact on the business model. In our opinion, ESPN accounts for a disproportionate share of Disney's cash flow and the gap between OCF (7%) and EBIT growth (17%) over the last two years likely already points to this pressure from subscriber losses. This issue could be compounded by potential step ups in cost recognition."
U.S. Dollar Strength Hurts Exports
The nearly guaranteed increase in interest rates will continue to strengthen the greenback. Throughout years of weak dollar value on the back of near zero interest rates, foreign spending at Disney-themed attractions thrived. As the dollar grows in value, levels of spending by foreigners in both domestic and international properties will likely plummet.
Risks To Consider: It is critical to note that an extreme short interest, as seen with Disney stock, can also be interpreted as a bullish signal. In addition, Disney continues to post strong quarterly results despite the bearish pressures.
Action To Take: Consider eliminating or lightening your portfolio holdings of Disney stock. I expect to see Disney shares at $75.00 by November 2017.
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