Disney: Sequels Around Marvel, Lucasfilm and Disney’s Characters Will Drive The Studio Business Growth

Disney’s (NYSE:DIS) movie business has seen steady growth in the past few years, led by strong franchises and sequels around Marvel, Pixar, and the Disney universe. Accordingly, the box office revenues have grown steadily and are expected to continue this trajectory. We believe that the studio’s popular franchises and characters such as Captain America, Avengers, Thor and Frozen, should continue to do well in the coming years.  There were no signs of a lull in their recent sequels and their next sequels are eagerly awaited. Moreover, Disney will release Star Wars: The Force Awakens in December of this year and two more episodes are planned for the coming years. We believe that the Star Wars movies will be a game-changer for Disney’s studio operations and boost its global market share. Having said that, it must be noted that the performance of a studio can be erratic as it largely depends on the audience and box office response, which can be fickle and hard to anticipate. Star Wars could bring tremendous success for Disney across its portfolio of offerings, including television, theme parks and consumer products. Higher-than-expected growth in box-office revenues could add incremental revenues of $1 billion over our current forecast. This could trigger a 5% upside to the stock, in our estimation.

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Disney’s Studio Has Increased Its Box-Office Market Share Through Acquisitions

The studio business contributes more than 12% to Disney’s value, according to our estimates. Disney’s global box-office revenues have increased from $1.16 billion in 2008 to $2.14 billion in the calendar year 2014. Looking at the global box-office market share, it has been in the range of 7% to 10.5%.

This growth can largely be attributed to its successful acquisitions in the past. Disney has added to its movie-making assets through a series of acquisitions, including the purchases of Pixar (for $7.4 billion),  Marvel (for $4.2 billion), and Lucasfilm (for $4.1 billion).  Lukasfilm, in fact, was the maker of the earlier Star Wars films, which have a huge fan following, with close to 14 million followers on Facebook.  It shouldn’t be difficult for Disney to repeat the success of Marvel and Pixar with Lucasfilm. Disney has also stated that it is planning a significant Star Wars presence in its theme parks. While Disney has paid billions of dollars for these acquisitions, we think that the price paid is justified as it has been able to generate massive revenues and profits from them. For instance, Marvel’s 10 films (after Disney’s acquisition in 2009) have grossed over $7 billion at the box-office. This is just the movies business; Disney also earns revenues through the characters and franchises across its portfolio, including television, theme parks, movies and retail merchandise.

Disney’s Franchises Have Done Well In The Past And Are Expected To Continue The Trajectory

Disney currently commands close to 20% market share with around $1.27 billion grossing at the U.S. box-office for 2015. ^[1] However, the grosses, including international markets, currently stands around $2.80 billion. ^[2] The studio’s three movies, Avengers: Age of Ultron, Inside Out and Cinderella, accounted for 90% of the overall grossing in 2015. Disney had a fantastic run at the box office so far this year and it has a solid lineup for the coming months, as well as in the next few years, when the studio will reap the benefits from sequels to Star Wars, Avengers, Captain America, Toy Story, Frozen and Thor. Given the popularity of these franchises and associated characters, we estimate the box-office revenues will grow and be around $3 billion, and an estimated EBITDA margin of 29% for Disney’s studio business will translate into EBITDA of $860 million, representing around 3% of the company’s overall EBITDA by the end of our forecast period. However, a better than expected performance of Star Wars at the box-office could lead to higher revenue growth in the coming years and translate into a 5% upside to our price estimate for Disney. Here, we estimate the segment revenues to be north of $4 billion by 2021. Profit growth will not only come from higher revenues but also from higher EBITDA margins. It must be noted that the Star Wars contribution will be much higher if we account for Disney’s other products and services.

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1. Studio Market Share, Box Office Mojo [↩]
2. 2015 Worldwide Grosses, Box Office Mojo [↩]