Walt Disney (DIS -0.93%) could be poised for a big boost this winter, as it is scheduled to release the sequel to one of the biggest blockbuster films ever. Avatar set the record for the highest-grossing film at $2.8 billion when it hit the big screen in 2009.
Avatar 2: The Way of the Water will be coming out in theaters this December, setting Disney up for a potential billion-dollar windfall. That could be a significant boost for the stock, down 54% off its high.
The sequel to Avatar could generate more than $1 billion in revenue for Disney. Typically, studios and theaters split box-office revenue 50/50. Using that assumption, if Avatar 2 generates similar revenue as the original, Disney's share could be upwards of $1.4 billion. That would be a meaningful injection for Disney, which held $13.3 billion in cash on its balance sheet and $46.6 billion in long-term debt.
DIS Total Long Term Debt (Quarterly) data by YCharts
Disney took dramatic actions at the pandemic's onset, including pausing its dividend and borrowing billions of dollars to ensure it would make it to the other side. It was forced to close the doors on many of its lucrative, consumer-facing operations to help slow the spread of COVID-19. Disney also made a substantial acquisition in 2019, partially financed through borrowing. Therefore, cash has become a more scarce resource than usual for Disney.
Furthermore, director James Cameron said Avatar 3 is 95% completed and could be released on the big screen as early as December 2023. Therefore, the second installment of Avatar that comes out this winter could have broader implications. If it turns out to be a hit at the magnitude of the first film, it could give Disney over $1 billion in cash, and it could also set it up for another $1 billion or more when the third installment comes out next year.
The return of box office blockbusters is yet another piece of its operations that are returning to prior form after pandemic disruptions. In its most recent quarter, which ended on April 2, the segment that includes theme parks more than doubled its revenue year over year to $6.6 billion, up from $3.2 billion.
Buy Disney stock before it reaches full strength
This is an excellent time for investors to buy Disney stock. It's down 54% off its high, as investors are not entirely convinced it can return to full strength following the hit it took due to the pandemic.
However, there are signs that Disney is making good progress. For instance, guest spending per-capita at its theme parks was 40% higher in its most recent quarter ended in April than the comparable quarter in 2019.
DIS PS Ratio data by YCharts
Meanwhile, Disney's stock is selling at a price-to-sales ratio of 2.2, near its lowest in the previous decade. This means investors are paying a discount price for a premium business that was temporarily hobbled.
