Star Wars: Episode VII -- The Force Awakens is only the third film to ever gross more than $2 billion at the worldwide box office. Credit: Lucasfilm.
By my estimates, Star Wars: The Force Awakens has already brought Walt Disney (DIS 0.34%) over $700 million in box office profits. You wouldn't know that to look at the recent action in the stock. Disney shares sold off 4.7% following its Feb. 9 earnings report because of reported weakness in the cable sector -- and, in particular, ESPN.
But is that really fair? Is a wobbling cable unit a legitimate reason to be avoiding Disney stock altogether? We can answer that by looking first at the impact The Force Awakens has already had on the business.
Awakening the beast within the studio
Neither the most profitable nor the highest grossing of all time, the latest installment in the Star Wars saga has been a blockbuster:
| Top Grossing Films | Studio Distributor | Worldwide Gross | Estimated Box Office Profit | Margin % |
|---|---|---|---|---|
| Avatar | Fox | $2,787,965,087 | $1,033,982,544 | 37.09% |
| Marvel's The Avengers | Disney | $1,519,557,910 | $459,778,955 | 30.26% |
| Jurassic World | Universal | $1,670,400,637 | $620,200,319 | 37.13% |
| Star Wars: Episode VII -- The Force Awakens | Disney | $2,028,085,655 | $714,042,828 | 35.21% |
| Titanic | Paramount | $2,186,772,302 | $823,386,151 | 37.65% |
| TOTALS | N/A | $7,404,816,504 | $2,617,408,252 | 35.35% |
Sources: Box Office Mojo, author's estimates.
For Disney, The Force Awakens delivered a force push to studio operating profit, which soared 86% in fiscal Q1.Yet we've seen this before. For most of the seven years since its acquisition of Marvel Entertainment, Disney has found ways to bring audiences more of what they want and then ink licensing and merchandising deals related to the new properties. From Iron Man to The Avengers to Guardians of the Galaxy and a sweeping deal with Netflix, Disney has bulked up units that were once considered ancillary, resulting in a much healthier operation:
| Segment | % of TTM Operating Income | % of FY 2009 Operating Income | DIFFERENCE |
|---|---|---|---|
| Consumer Products & Interactive | 13.26% | 4.71% | 8.55% |
| Studio Entertainment | 15.86% | 2.62% | 13.24% |
| Media-Broadcast | 6.42% | 7.57% | (1.15%) |
| Media-Cable | 43.63% | 63.85% | (20.22%) |
| Parks & Resorts | 20.82% | 21.25% | (0.43%) |
Sources: S&P Capital IQ, author's estimates.
That's not all. As Studio Entertainment and Consumer Goods & Interactive divisions have come to account for more profit, Disney itself has become more profitable. Companywide operating margin has improved from 10% to 17.5% over the past seven years.
In simpler terms, this means Disney is trading up -- earning 7.5 cents more for every dollar of sales today than it did when cable was accounting for the vast majority of its profits.
A slight shift with huge consequences
Further gains seem likely, thanks to a slight change in the way Disney will account for royalties, licensing, and video game properties going forward.
In January, the House of Mouse merged its once-independent Interactive group into the Consumer Products group. Their combined results will now reflect Disney's success with merchandising intellectual property based on its library of characters -- with one notable exception. Merchandise that's based on "certain film properties" will be recorded as studio revenue.
To account for the change, in fiscal Q1, Disney moved $262 million in operating profit from Consumer Goods & Interactive to Studio Entertainment. (Check page 8 of Disney's latest 10-Q quarterly report for a closer look at the legalese.) The Force Awakens is likely responsible for a big chunk of that revenue. Looking ahead, we may see similar gains from Star Wars: Rogue One (December 2016) and Captain America: Civil War (May 2016), among others.
For now. this is nothing more than an accounting change with no catalytic effects. Yet the long-term impact could be massive, especially if studio executives conceive of and sign merch and licensing agreements immediately after greenlighting new franchise properties. Proper tie-ins could create hundreds of millions or even billions in new revenue.
Whether that helps offset weakness in the cable business is tough to know at this point. Either way, Disney has been planning for this moment since acquiring Marvel all those years ago, and it should continue to pay off for many more years to come.
Now it's your turn to weigh in. Would you buy Disney stock at current prices? If not, which studio would you invest in? Keep the conversation going in the comments section below.
