Macquarie Securities analyst Tim Nollen on Monday published a bullish report on Walt Disney and its stock, citing such catalysts as the new football season, the new Star Wars film and next year’s launch of the Shanghai Disneyland theme park.
“We continue to view Disney as one of the very best overall franchises in media,” he said in the report entitled “Defending Disney: Catalysts in Store,” wherein he also reiterated his “outperform” rating on the stock. “After a 16 percent fall in the shares in the past four weeks [versus the S&P 500 down 5 percent], we think investors now have an interesting entry point to a stock with three major near-term catalysts.”
The first catalyst is the return of football season, which he argued “could help restore some confidence in ESPN.” The second is Star Wars: The Force Awakens, which Nollen said “could provide an immediate catalyst this week with the Sept. 4 global consumer product launch, leading into the film release Dec. 18.” He estimated that new consumer products tied to the film franchise could bring in revenue of $5 billion in the first year.
The third catalyst he cited is the Shanghai park opening in spring 2016. Nollen updated his revenue expectations for Star Wars and Shanghai, leading him to raise his earnings per share estimates.
Discussing the new Star Wars movie in more detail, Nollen said it “could generate $5 billion in consumer merchandise sales in its first year of release, assuming it does better than Cars 2’s $3 billion.” After the revenue for retail and merchandise partners, he estimated that “this would easily net Disney about $500 million in licensing and retail revenue.”
Disney will be unveiling Star Wars: The Force Awakens consumer products over an 18-hour period via a YouTube special, “announcing and un-boxing a new product roughly once every hour from a total of 15 different global locations, featuring online talent from its Maker Studios” starting Wednesday evening, Nollen detailed. Sales will officially start at midnight at select Disney stores, as well as certain stores operated by other major retailers.
“It’s not clear how to model this as we can’t name a similar such event,” the analyst said. “But looking at another successful Disney franchise, Cars 2 sold more than $2.8 billion worth of merchandise in its first year alone in 2011, and the original Cars movie sold approximately $10 billion worth of merchandise in its first five years of release. Taking into account the strength of the Star Wars franchise, which has altogether sold over $20 billion worth of licensed goods in its lifetime, we estimate that Star Wars: The Force Awakens could perhaps bring in merchandise sales of $5 billion in the first year.”
His assumptions predict a higher than usual licensing fee for toys and products, however. “Disney does not disclose its licensed revenue share per product and/or brand. However, in fiscal year 2014, Disney earned $2.54 billion in licensing and publishing revenue, as compared to the $45.2 billion total retail sales of Disney’s licensed products,” representing a licensing fee of approximately 6 percent, the analyst wrote. “Given the Star Wars brand, we estimate that Disney may be able to earn a higher licensing fee, perhaps closer to 10 percent.”
But he lauded the conglomerate for its planned reveal of the Star Wars merchandise. “In true Disney fashion, the company is making this a media event with an 18-hour unveiling of products on YouTube,” Nollen wrote. “We also estimate the movie itself should gross about $2 billion at the global box office, netting nearly $1.2 billion in revenue for the company.” This would put the film at No. 3 in the all-time box-office ranking behind Avatar and Titanic.
Discussing fall football returns, Nollen highlighted: “The college football season starts in full force this coming weekend, and NFL Monday Night Football begins Sept. 14. The start of football season last year led to a 2 percent increase in live-same day ratings for ESPN in September.”
The analyst explained: “We are perhaps less bearish than some on cord-cutting, based on work we have done on offsets to the traditional bundle from skinny bundles and potential direct-to-consumer OTT offerings. We certainly don’t think ESPN will look to go direct-to-consumer anytime soon, but it could, and would probably be one of the very few basic cable networks to succeed in doing so.”
Nollen, in his report, also estimated that the Shanghai park could add $300 million in revenue in fiscal year 2016 and break even within two years, “whereafter it contributes a small but rising percentage to earnings per share.” And, as the analyst suggested, “Shanghai could also open doors to establish a TV licensing or network deal with [Chinese state broadcaster] CCTV.”
