Walt Disney earnings and shares could be set for major Star Wars upside, FBR & Co. analyst Barton Crockett said in a report on Tuesday, citing box-office tracking data for The Force Awakens and analyzing its effect on spin-off Rogue One.
While he kept his own financial forecasts and his $126 price target for Disney’s stock and his “outperform” rating on it unchanged, he said there was a case to be made for earnings upside. In a plausible scenario of upside to his estimates, he said the company’s earnings per share could rise 35 percent over the next two years.
“We see current tracking for a Star Wars: The Force Awakens de-risking downside as making a plausible argument for 35 percent upside potential in Disney earnings per share by fiscal year 2017,” he wrote. “The main driver is that assumptions for sequel Rogue One in December 2016 are likely to catapult up to mirror Force Awakens, driving a potential $1 billion to $2 billion lift to our and, we believe, Street consensus’ (such as they exist) profit assumptions for Rogue One.”
Forecasts for the film’s box office are, of course, particularly tricky given the level of buzz and more than $50 million in advance ticket sales recorded a month before the Dec. 18 opening. “There are a number of things that put this film in uncharted territory, literally uncharted territory, making it even more difficult than usual to predict what the opening weekend will be,” Walt Disney Studios chairman Alan Horn told THR recently. “In December it’s rare to see a big debut — there’s only a handful above $70 million by the way, with the record being something like $84 million.”
In a recent studio chiefs roundtable, he also said: “t would be a shame if our picture went out with — I’ll pick a number, $1.3 billion, $1.4 billion, $1.5 billion [in worldwide gross] — and people are disappointed.”
Sources told THR before the first tracking services data that the movie could open in the $185 million-$220 million range. Many box-office experts predict it will have the biggest domestic opening in history, exceeding the $208.8 million earned by Jurassic World in June.
Force Awakens tracking suggests $1 billion potential domestic box-office revenue for the film, Crockett wrote in his report. “Our base assumption remains that Force Awakens has $730 million domestic box office, ranking just behind Avatar‘s all-time record of $761 million,” Crockett explained. “However, current tracking argues for a December 18 opening weekend at the $200 million level (we assume $185 million), 2.5 times Avatar‘s $77 million on a comparable weekend in 2009 and similarly above the December record $85 million opening for The Hobbit: An Unexpected Journey in 2012. Big December movies typically earn nearly five times opening weekend in total domestic box, suggesting Force could fetch nearly $1 billion in domestic box over its total run.”
He concluded: “Force Awakens could make total profits of $2.7 billion.” If the domestic figures were reached, that could yield a film profit of $2.7 billion assuming that international box office is 2.5 times domestic revenue, which the analyst said would be “on par with averages for large global tentpoles.” His own base estimate is for less than $1.9 billion.
Wall Street expectations for Rogue One “should jump” on the strong tracking, Crockett said. “A typical assumption for sequels is performance near the predecessor, arguing for a $1.6 billion to $2.4 billion lift to our current $300 million film profit estimate for Rogue One, which is based on domestic box office of $300 million.” Other box-office observers have highlighted though that Rogue One is not a traditional sequel.
The analyst also weighed in on consumer product revenue for the new Star Wars films. “Our base assumption is that, in fiscal year 2016, Disney’s fees from licensed merchandise rise $90 million, to $2.05 billion, with a $300 million lift from Force Awakens offsetting declines in Frozen and classic Star Wars,” he wrote. “But, with an unprecedented Force Friday promotion after Labor Day, industry-high fee splits, ample shelf space for Christmas, and broad category presence, an upside case of $700 million of fees on $5 billion of merchandise sales looks reasonably possible.”
Crockett said his earnings model calls for Disney segment profit rising 13 percent to $16.6 billion in fiscal year 2016, which started in early October, and 4 percent, to $17.2 billion, the following year. That would mean earnings per share gains of 15 percent and 7 percent, respectively. “But a reasonable upside case ($1 billion domestic box for Force/Rogue, plus $700 million consumer product license fees) drives 7 percent and 11 percent upside to our earnings per share estimates, and earnings per share in fiscal year 2017 35 percent above fiscal year 2015, suggesting similar stock appreciation potential,” he said. “We see potential additional lifts in later years from the Shanghai [theme] park launch, Frozen sequel, new Avatar and Star Wars attractions in theme parks, and potential new SVOD launches.”
While some have highlighted ESPN pay TV subscriber losses, Crockett said: “We view concerns about two-month-old ESPN sub numbers…as overdone.”