In an Aug. 31 report on The Walt Disney Co. (NYSE:DIS), Macquarie Securities analyst Tim Nollen said the company has some major catalysts that could drive its shares back up to where they were before it reported quarterly results on Aug. 4. Among those catalysts are the upcoming football season and the opening of Shanghai Disneyland, as well as the much-anticipated return of Star Wars to movie theaters, where he expects the latest film to gross about $2 billion at the box office
But perhaps the most interesting fact from the report as reported by The Hollywood Reporter was Nollen's assertion that Star Wars-related products, which start hitting store shelves today, dubbed "Force Friday," could bring in some $5 billion in first-year revenue. Nollen thinks Disney's licensing agreements would allow it to reap $500 million of that. That would be a big win for Disney's consumer products division, which generated just under $4 billion in 2014, and just about $4.4 billion over the past 12 months.
It's an optimistic estimate ... but is it too optimistic?
As investors, we should always exercise a healthy skepticism. That $5 billion is huge, but is it realistic?
Nollen looked at a few historical examples. He looked as Disney's huge Pixar film Cars 2, which generated some $2.8 billion in consumer products revenue in the first year. He also looked at the original Cars movie, which hauled in just about $10 billion in product sales over a five-year span. He also looked back at the historical sales of Star Wars merchandise, which to date, Nollen noted, has generated more than $20 billion in revenue.
But Nollen's estimate also assumes that Disney will be able to impose a higher licensing fee on products sold. In 2014, Disney collected $2.54 billion in licensing and publishing revenue on $45.2 billion in product sales, or about 6%, he wrote. Nollen thinks the company will be able to fetch closer to 10% on highly anticipated Star Wars merchandise.
We can also look at Frozen to get a better perspective on merchandise sales. Although Disney did not offer details on revenue from Frozen products, quarterly revenue for the segment jumped by about $250 million over the prior year after the film's Nov. 27, 2013, release.
Make no mistake, Frozen had been a merchandising hit for Disney. But Star Wars, already with generations of fans awaiting its return, would seem to hold far greater promise on that front.
Drowned out by cable-cutter clatter
Whether or not Nollen ends up being right -- or close, as is probably a more fitting measure -- his analysis highlights an important opportunity that many Disney investors may have been overlooking.
Since the Aug. 4 earnings report, headlines have focused most intensely on Disney's media properties, especially ESPN, and the trend toward cable cutting. It's was CEO Bob Iger's remarks about subscriber losses that sent the stock into a tailspin from which it's yet to recover. As of the Sept. 3 close, the stock was down more than 16% from its recent high of $122 a share.
Concerns over that segment -- Disney's largest -- are not unfounded. But the media networks division makes up an increasingly smaller piece of Disney's overall income. Its parks, meanwhile, have become an increasingly larger piece, in part because they're continually becoming more efficient, generating a bigger profit based on the revenue brought in. But it's Disney's consumer products division that has been its fastest-growing segment over the past several years.
Not just about mouse ears anymore
Disney's consumer products business dates back to 1929, when the company first licensed the image of Mickey Mouse so it could be used on a children's writing tablet. The business now has a few different appendages. It still licenses its properties to other companies and collects a fee on items sold, the way it did with Mickey 86 years ago. Only now, it has a deep stable of characters and titles, from the originals to Marvel superheroes, to Pixar's popular animated characters.
Consumer products also includes more than 300 Disney Stores worldwide and its publishing arm, which is one of the world's biggest publishers of kids' books, magazines, and digital properties.
Since 2009, consumer products revenue has grown by 80%. That's better than double the 39% growth in the media segment, and it dwarfs the 20% growth of its studio division. In the past 12 months, it also made up 13% of the company's income, up from single digits just three years ago.
Star Wars merchandise should help to drive those numbers higher in fourth quarter of 2015 and beyond.
Even if he's wrong, he's right
If Nollen's forecast proves accurate, the Star Wars merchandise would provide a segment revenue surge of more than 12% in itself. But even if his figures overshoot the first-year revenue significantly, his note serves as a good reminder to investors about the potential consumer products growth that will accompany the Star Wars franchise. With a series of movies in the works, this is a long-term catalyst that will benefit the company for years to come.