We previously wrote that Disney (NYSE:DIS) should be careful with the launch of big budget movies as the potential for loss is high if the movie fails to impress (see article Disney Updates: Upcoming 3D Sci-Fi Movie, Storybook Apps for iOS) However, as expected, the latest Sci Fi movie from Disney, John Carter, is projected to cost the company about $200 million.  Although one movie blunder is never a concern for a company as huge and diversified as Disney, it is worthwhile to take a look at the value impact if such blunders become a habit. Disney competes with other media companies such as News Corp (NASDAQ:NWS), Time Warner (NYSE:TWX) and Viacom (NASDAQ:VIA).
We estimate that about 20% of Disney’s value comes from its filmed entertainment business – Disney Studios. About 5.5% out of this 20% comes from box office sales.
If Disney suffers one big flop movie every year that results in $200 million reduction in cash flows from box office business, it would lead to a very mild downside of about 3% to our price estimate. Nevertheless it is quite obvious that the effect of a failed film will percolate down to DVD sales and content licensing. Let’s assume that another 2%-3% downside comes from reduced sales in DVDs and content licensing. This implies that one huge flop movie every year can push down Disney’s value estimates by 5% according to our estimates.
The reaction of the market to the news was fairly accurate as the shares fell by just 1% in after-hours trading following the announcement. This event is not a concern if Disney can learn from it and it doesn’t not become a habit. The media companies are going for big bucks with 3D big budget movies following the success of News Corp’s Avatar. However they can not get carried away and instead should focus on basics of a movie, not just the visuals. John Carter is likely to serve as a reminding example.
Our current price estimate for Disney stands at $52.15, implying a premium of close to 20% to the market price.Notes: