Theaters are becoming a major source of entertainment for people in many countries. The advanced technology, easier access to a high-standard theater and the high definition screens play a vital role in increasing the viewer traffic over the past few years. Walt Disney Studios, the business segment of Walt Disney (NYSE:DIS), has played a vital role in the entertainment sector by continually providing blockbuster movies. In this article, I will analyze this business segment and its future prospects.
Walt Disney's Market Share
As of Nov. 6, the company has achieved a 14.59% market share and is the second largest distributor after Warner Bros. Over the years, the segment has achieved a higher position in the entertainment industry with the help of a series of successful acquisitions including Pixar (2006), Marvel (2009) as well as its most recent acquisitions of Lucas film and the beloved "Star Wars" franchise. Over a period of five years, the company has achieved an excellent success by growing its market share from 10.4% to 14.59%.
Walt Disney's Studio Entertainment Subsidiaries
Marvel Entertainment, a wholly-owned subsidiary of The Walt Disney Company is famous for its superheroes. Since 2008, it has released seven movies that made over $5 billion worldwide, with an average worldwide gross of $716 million per film. Both "The Avengers" and "Iron Man 3" made over $2.73 billion worldwide and are among the top 5 highest-grossing movies of all time. "The Avengers" is the third highest-grossing movie of all time, raking in over $1.5 billion worldwide.
Disney's Pixar has produced fourteen feature films, "Toy Story" being its first in 1995. All of the fourteen movies have debuted with Cinema Score ratings of at least A-, which indicates a very positive reception from audiences. As of July 2013, its feature films have made over $8.3 billion worldwide with an average worldwide gross of $597 million per film. Both "Finding Nemo" and "Toy Story 3" are among the 50 highest-grossing films of all time. All of Pixar's films have made it to the top 50 in the highest-grossing animated films list. "Toy Story 3" is the all-time highest and grossed over $1 billion worldwide.
Walt Disney Animation Studios has a long history of producing award-winning animated series. With the success of "The Princess And The Frog" in 2009, the studio continued production with a new fairy tale film. "Tangled" was released in 2010 and became a blockbuster hit. The film earned $587 million worldwide in box office revenue; $201 million of which was earned in the U.S. and Canada. The film became the second most successful film of the studio after "The Lion King." In 2012, "Wreck-It Ralph" was released to critical acclaim and commercial success. The movie won numerous awards including the Annie, Critics' Choice, and Kids' Choice Awards for Best Animated Feature Film, received Golden Globe and Academy Award nominations, and earned $473 million in worldwide box office revenues. In addition, the studio won its first Academy Award in 44 years for its short film "Paper Man."
The Disney Studio Entertainment segment generated 13.8% of the company's revenue in 2012. The studio released two films in the third quarter 2013, "Iron Man 3" and "Monsters University," both of which performed exceptionally well at the box office. "Iron Man 3" generated $1.2 billion in global box office as compared to the Avengers, which generated $1.5 billion globally last year. So far, "Monsters University's" box office performance is quite favorable as compared to the movie "Brave" released last year.
However, the operating income of the studio declined year over year. This decline was due to pre-released marketing expenses for "The Lone Ranger," "The Avengers," and "Iron Man 3." "The Avengers" also had strong DVD sales during Q4 of the last year, so the DVD release of "Iron Man 3" in Q4 this year will hopefully bring in high revenues for the business. The company expects that this will result in sales of about $45 million for the studios in Q4. Furthermore, due to the disappointing box office performance of "The Lone Ranger," the company expects to incur a loss of about $160 million and $190 million during Q4.
The acquisition of Marvel Entertainment continues to drive real value for the company. Following the record-setting performance of "The Avengers" last year, the huge success of "Iron Man 3" this summer continues the Marvel momentum. This bodes well with the upcoming Marvel releases, which include "Thor: The Dark World," "Captain America: The Winter Soldier," "Guardians Of The Galaxy," and "Avengers 2," which will be released in the next three years. Additionally, "Tangled," "Brave," "Wreck-It Ralph," and "Monsters University" proved to be the blockbusters in their own right. I believe that the upcoming Pixar-animated movie "Frozen" will generate some serious business for the company.
The last few months have been important for the entertainment industry because of the holiday season. This year Disney's major releases are "Thor: The Dark World" and the animated movie "Frozen." These two movies are also important for Disney because of the serious amount of money lost from "The Lone Ranger." I believe that these two movies will offer a healthy start to Disney's fiscal year 2014.
The table above shows the estimated revenues for the upcoming movies and their incremental revenue per share. Based on the historic performance of Marvel's last two blockbuster movies I believe that "Thor 2: The Dark World" will generate $1.36 billion in box office revenue worldwide or $0.76 per share incremental revenue for the company. Similarly, based on the historic performance of its animated movies, I believed that "Frozen" will able to generate as much as $673 million in worldwide box office revenue or $0.38 per share incremental revenue for the company. Overall, these two movies will equal $1.14 per share of incremental revenue for the company.
The next two years will be critical for the company as many blockbuster movies will be entering theaters and stores. The "Avengers 2," "Star Wars VII," and "Pirates Of The Caribbean" are the most anticipated movies, which is why I have adopted a bullish stance on Disney. Disney saw studio revenue decrease to $5.8 billion in fiscal year 2012, which is a decline from the $6.4 billion earned in fiscal year 2011. However, the launch of several blockbuster movies should help this number rise significantly in 2015.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article.