As “Star Wars: The Force Awakens” speeds toward its December 18 release date, analysts are predicting the movie franchise’s return to U.S. theaters will buoy Disney’s (NYSE:DIS) earnings and banish investor concern about ESPN’s subscriber woes to a galaxy far, far away.
Early box office projections for “The Force Awakens” are staggering. Based on tracking data, the film could produce a profit of anywhere from about $1.9 billion to $2.7 billion, with high-end estimates of a $1 billion take from domestic theaters and $2.5 billion from its international audience, FBR & Co. analyst Barton Crockett wrote in a December 1 research note. A strong performance, coupled with the release of “Star Wars: Rogue One” and other sequels in the coming years, should bolster Disney’s stock for the foreseeable future, even amid ESPN’s ongoing issues.
“There’s a tremendous amount of buzz that’s building all around for this franchise, which a lot of analysts, including myself, are thinking this could be perhaps the single most impactful multimedia event or franchise debut that the company has ever undertaken,” said Tuna Amobi, an entertainment analyst at S&P Capital IQ. “But keep in mind, from an investor perspective, a fair amount of this expectation is already built into the stock price. Right now, the debate is, how much more upside can this film have?”
In all, Crockett’s model calls for Disney’s segment revenue to jump 13% to $16.6 billion for its 2016 fiscal year, with an additional 4% increase to $17.2 billion in 2017. Similar numbers for “Rogue One,” slated for release in December 2016, could push those numbers even higher. Disney should see an impact within three to six months, according to Crockett’s report.
“We see current tracking for a ‘Star Wars: Force Awakens’ de-risking downside and making a plausible argument for 35% upside potential in Disney earnings per share by fiscal year 2017,” Crockett wrote. “The main driver is that is that assumptions for sequel ‘Rogue One’ in December 2016 are likely to catapult up to mirror ‘Force Awakens,’ driving a potential $1 billion-$2 billion lift to our, and, we believe, Street’s consensus’ (such as they exist) profit assumptions for ‘Rogue One.’”
“Force Awakens” also should drive licensed merchandise sales. Crockett projects “Star Wars” will boost Disney’s fees from licensed products to $2.05 billion, adding that an “upside case of $700 million in fees on $5 billion of merchandise sales looks reasonably possible.” The new “Star Wars: Battlefront” video game hit stores last month, and a theme park is on the way, too.
The new “Star Wars” movie’s long-awaited arrival is great news for Disney after a somewhat turbulent November, when ESPN’s dwindling subscriber base briefly spooked investors. Like many media outlets, ESPN has struggled to reconcile its traditional paid-cable model with the rise of so-called “cord-cutters.” Consumers are increasingly turning to less expensive “skinny” cable bundles with fewer channels, or canceling their cable services entirely in favor of streaming services like Netflix (NYSE:NFLX) and Hulu. Disney’s cable providers, led by ESPN, are a major source of operating income.
ESPN had 92 million paid subscribers as of October 3, down from 95 million in September 2014 and 99 million at its peak in 2013, according to the company’s 10-K regulatory filing last month. With customers purportedly paying $6.61 per ESPN channel per month, the loss of that many subscribers could cost Disney hundreds of millions of dollars in revenue.
Chief executive Bob Iger has downplayed the impact the subscriber losses will have on the media giant’s business, and ESPN has secured media rights deals with several major sports leagues to maintain its live content offerings. Disney’s stock dropped on Black Friday, two days after the 10-K filing’s release, but it quickly rebounded in subsequent trading. And “Star Wars” is generating enough momentum to shift the conversation among investors away from ESPN’s struggles.
“Those concerns have died down significantly, but they’re still there,” said Amobi. “I think the buzz around this film, this franchise, really tends to dominate those types of concerns.”
Low Risk, High Reward
While the “Star Wars” series’ box office success seems like a foregone conclusion, there is some concern that the film’s take could fall short of its monstrous projections. Crockett downplayed that issue, citing Disney’s deft handling of the Marvel franchise and other pop culture.
“Performance at these levels requires repeat visits, which typically requires a good movie. However, Star Wars movies have generated ample box office with mixed reviews, and the same could be said of other strong-performing franchises, such as ‘Pirates of the Caribbean’ and ‘Jurassic Park,’” he wrote.
In the unlikely event that “Force Awakens” does fall short, experts say the “Star Wars” franchise still will be a major asset to Disney going forward. Even box office numbers below current projections would generate a massive windfall for Disney.
“If it were to fall short of expectations, no one expects it to fall to the Earth. It’s all going to be relative to the high expectations that were set for the film,” Amobi said. “It could be the difference between talking about several hundred million dollars opening weekend, to maybe a $200 million opening weekend. Is that considered disappointing? Obviously that would be robust by any measure.”