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Disney’s Coco Is a Bigger Hit than You May Think

By Jamal Carnette, CFA - Dec 6, 2017 at 5:59PM

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Investors should pay attention to all Disney's films, not just its tentpole franchises.

For the second week in a row, The Walt Disney Company's (DIS 4.68%) Coco won the weekend box office. In the U.S. and Canada, Coco topped Warner Bros' (a division of Time Warner) Justice League by hauling in $26.1 million versus $16.6 million. Through its second week, the film has topped $280 million in global box office on the back of positive reviews (the movie has an enviable 97% rating on Rotten Tomatoes).

For most studios, a near $300 million haul in the first two weeks would be reason to celebrate. However, Disney is not most studios. In fact, Coco barely ranks in the top 100 box office hits (non-inflation adjusted) for Buena Vista. As such, it's easy to overlook the movie's success with the next installment of the Star Wars trilogy releasing later this month. Here's why that's wrong.

Two children, eating popcorn and watching a movie at the theater.

Image Source: Getty Images.

Coco's foreign earnings should give the movie a long tail

What separates Coco from other Buena Vista films isn't total box office haul, but rather where it's coming from. According to Box Office Mojo, $171 million, or 61% of Coco's total box office gross, is from foreign theatres. Unsurprisingly, a film about the Mexican holiday Dia De Los Muertos has done well there, breaking box office records in the country, but Coco is also the highest-grossing film solely from Pixar Animation Studios in China.

At first glance, 61% of box office revenue from abroad isn't abnormally high for a Disney release. Last year's live-action version of The Jungle Book took 62% of its box office gross from foreign theaters, and this year's live-action Beauty and the Beast re-release produced 60%. The difference is that Coco hasn't launched in many major markets including Australia, the United Kingdom, Italy, Brazil, Korea, and Japan, where it's slated for a mid-March release.

In the United States, the average movie has a wide release (more than 200 theatres) run of four weeks, earning most of its revenue in the first two. The trends are that Coco should slow in the United States but will have a longer revenue tail than other movies, and a larger foreign percentage, as those box office receipts come online.

Disney's studio is picking up the slack, will need to continue to fire on all cylinders

From an investor perspective, Disney's studio is becoming more important. Although Disney still generates considerable revenue from its media networks division, broadcast and cable television, recently this division has seen its profit narrow due to falling subscribers and increased content costs, notably the cost of sports from its ESPN family of networks.

Meanwhile, the company has continued to wisely acquire properties for its studio network division, including Lucasfilm, Marvel, and Pixar. This strategy is beginning to show results. Since 2013, the company has grown operating income from that division 37% per year, from $661 million to $2.4 billion, and has seen the division go from 6.2% of total operating income to 15.9%.

Chart of Disney's Total Operating Income, Studio Operating Income, and percentages.

Figures are from Disney's 10K and are in millions. Author's chart.

For Disney to continue to grow its studio entertainment, it will not only require a strong effort from tentpole franchises like Star Wars and Marvel Universe, but also worldwide success from new stories and characters. Disney investors should look forward to the huge box office take from Star Wars: The Last Jedi later this month, but not overlook the importance of Coco and its strong showing in foreign markets.

Jamal Carnette, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.

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