Sony: Film Slate Ready To Deliver

| About: Sony Corporation (SNE)

Summary

Sony Pictures segment an important piece of the overall puzzle.

The upcoming lineup of movies for 2016 and 2017 could increase Sony's market share.

Pictures segment was a bright spot in a down fiscal 2014.

Sony (NYSE:SNE) saw its stock jump 19% in 2015 after years of falling below the $20 level. The stock now may be in trouble as the company continues to lower its forecast and see several units falling rapidly. With fourth quarter earnings on deck next week, Sony shares will no doubt be in the spotlight. I don't think now is the time to buy shares, but believe any sign of weakness in the shares, which are up 7% in 2016, could be an opportune buying chance. This article will highlight Sony's movie division and how it could provide some unforeseen upside to the company's overall financials.

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(Image Credit: Marvel)

The big news that investors haven't had a chance to process yet is that Robert Downey Jr. (Iron Man) has been added to the cast of the new 2017 Spider Man movie. This adds excitement to an already highly anticipated movie from Sony. Remember, Sony has the movie rights to Spider Man, but agreed with Disney's (NYSE:DIS) Marvel to loan him out for several upcoming movies starting with "Captain America: Civil War" this May. In return, Marvel will provide some characters for the upcoming slate of Spider Man movies. This is huge for Sony and could help carry on the Marvel story line and also boost the Spider Man brand, which has shown signs of weakness. Check out the prior box office history (Box Office Mojo) of Spider Man and Iron Man:

Movie

Open Gross

Domestic Gross

Foreign Gross

Total Gross

Spider-Man (2002)

$114.8 mil

$403.7 mil

$418.0 mil

$821.7 mil

Spider-Man 2 (2004)

$88.2 mil

$373.6 mil

$410.2 mil

$783.8 mil

Spider-Man 3 (2007)

$151.1 mil

$336.5 mil

$554.3 mil

$890.9 mil

The Amazing Spider-Man (2012)

$62.0 mil

$262.0 mil

$495.9 mil

$757.9 mil

The Amazing Spider-Man 2 (2014)

$91.6 mil

$202.9 mil

$506.1 mil

$709.0 mil

Iron Man (2008)

$98.6 mil

$318.4 mil

$266.8 mil

$585.2 mil

Iron Man 2 (2010)

$128.1 mil

$312.4 mil

$311.5 mil

$623.9 mil

Iron Man 3 (2013)

$174.1 mil

$409.0 mil

$806.4 mil

$1.22 bil

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Those are some impressive totals for the prior movies. Robert Downey Jr. was in all three Iron Man movies. The Spider Man series has had two different leads and will feature its third in 2016. All three Iron Man movies, three of the Spider Man movies, and two Avengers movies (starring Iron Man) rank in the top 50 all-time domestic totals. The list of top opening weekend for movies also features "Iron Man 3," "Spider-Man 3," "The Avengers," and "Avengers: Age of Ultron."

I hinted at the Disney Sony partnership way back in October of 2014 before again giving investors my opinion of the deal in 2015. I continue to believe that this Spider Man movie will rebound and could gross $400 million domestically and more than $1 billion worldwide. It also helps that Tom Holland, the new Spider Man, has received stellar reviews of his take on the web slinger in "Captain America: Civil War." I said in 2014 that "initial talks between Disney and Sony over Spider Man rights may be small now but lead to big things." I firmly believe that this is true and think the new Spider Man partnership is huge.

The newly named "Spider-Man: Homecoming" will be released July 7, 2017. When looking at potential box office revenue, it's also important to see what else opens around it. In this case, June 23rd will see "Transformers 5" hit the big screen and June 30 brings "Despicable Me 3." No other movies are currently scheduled to go up against the new Spider Man. The following weekend (7/14) will see the release of "War for the Planet of the Apes." That's not a bad spot for Spider Man to be in, as it should win its first three weeks and possibly more. With an open of more than $100 million, then the next weekend totals of $65 million, $50 million, and $40 million, the movie could gross $255 conservatively in its first month.

Here is a look at some notable movies coming from Sony the next two years:

· "Angry Birds" - May 20, 2016

· "Ghostbusters" - July 15, 2016

· "The Magnificent Seven" - September 23, 2016

· "Inferno" - October 28, 2016

· "Passengers" - December 21, 2016

· "Smurfs: The Lost Village" - April 7, 2017

· "Bad Boys 3" - June 2, 2017

· "Uncharted" - June 30, 2017

· "Spider-Man: Homecoming" - July 7, 2017

· "Jumanji" - July 28, 2017

I highlighted that Sony also has a five picture deal with comic book company Valiant that will bring the characters Bloodshot and Harbinger to the big screen. Sony showed off many of the movies listed above and some others during its recent presentation at CinemaCon. Sony Motion Pictures chair Tom Rothman had this to say: "You will hear about many movies tonight that have name recognition in the world. We have a number of power brands that are re-launching and are being re-introduced." That's important to note when you look at the past box office success of several of the brands.

At CinemaCon, Sony's big focuses were on:

· Spider Man, Tom Holland was on hand to show off the new title and a clip from the movie. Sony says the title represents "a homecoming to the Marvel Cinematic Universe" and also alludes to the high school storyline in the movie

· The "Passengers" movie.

· Its animated slate of movies ("Angry Birds", "Smurfs: The Lost Village", the R rated "Sausage Party," unannounced "Emoji Movie," "Hotel Transylvania 3" and an untitled animated Nativity Story told from the animals perspective.

· Ghostbusters - The stars of the movie were in attendance and showed off clips as well.

· "Billy Lynn's Long Halftime Walk" was highlighted. I profiled this movie before in an article on Bona Film (now private). The Ang Lee picture could be Sony's answer to the war genre popularized with "Lone Survivor" and "American Sniper" of recent memory.

· A couple slides also showed off some logos and titles for movies that there aren't many details on including: Charlie's Angels reboot, Men in Black/21 Jump Street combo called "MIB 23," "The Girl Who Played With Fire," and "Zombieland 2."

Take a look at the chart of Sony's overall performance at the box office (Box Office Mojo) since 2006:

Year

Rank

Market Share

Box Office ($ mil)

# New Films

2006

#1

19.2%

1770

44

2007

#4

13.3%

1280

43

2008

#3

13.6%

1310

39

2009

#4

14.1%

1500

41

2010

#5

12.6%

1350

38

2011

#3

13.4%

1360

40

2012

#2

16.5%

1840

35

2013

#4

10.6%

1210

31

2014

#4

12.0%

1300

34

2015

#5

8.9%

1030

35

2016 YTD

#7

5.7%

186

9

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A lot of information can be drawn from these charts. First, it's worth mentioning that with the exception of 2006 and 2007, Sony released more movies than any other top five studio. It seems the company always tries to release as many movies as possible, with 30 or more released each of the last 10 years. The other big thing that stands out is how other than 2006 and 2012, Sony has ranked third or worse at the box office. Those two years didn't even come with ridiculous blockbusters. In 2006, Sony had five movies gross $100 million or more, led by "Da Vinci Code" with $217.5 million. In 2012, Sony saw a second place finish, but its strongest market share percentage ever. Releases that year included "Skyfall," "The Amazing Spider-Man," "Men in Black 3" and "21 Jump Street." The good news for investors than obviously is that releases of new Spider Man, Men in Black, 21 Jump Street, and Da Vinci Code movies could help increase market share in 2016 and 2017.

The strength of the movie segment and/or the underperformance of Sony's other divisions could spark rumors or activist interest in splitting the company up again. I wrote an article in 2013 supporting Daniel Loeb's call for spinning off Sony's music and movies business into a separate company. Look for this to be a possible topic in 2017.

In January, Sony reported third quarter earnings and now we have a picture of what the first nine months of the year look like. Here are the results:

Business Segment

Revenue (Billion Yen), YOY Increase/Decrease

Operating Income (Billion Yen)

Mobile Communications

944.3, -15.3%

-19.4

Game and Networks

1236.4, +12.5

83.5

Imaging Products

550.8, +0.8%

65.7

Home Entertainment

944.2, -5.9%

57.8

Devices

745.9, +6.2%

51.4

Pictures

617.4, +5.8%

-13.8

Music

450.1, +10.3%

73.7

Financial

812.2, -1.1%

139.4

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The chart shows that the Pictures segment is underperforming with an operating loss through the first nine months of the fiscal year. The company sees the Pictures segment hitting full-year revenue of 1,000 billion Yen and an operating profit of 35 billion yen. In the third quarter, Pictures saw revenue increase 26.9% to 262.1 billion Yen. In fiscal 2014, the Pictures segment performed quite well with revenue of 878.7 million Yen and operating income of 58,527 billion Yen. That made the Pictures segment the sixth largest for the company in terms of revenue, but the fourth highest in terms of operating income. As several other segments posted losses, the Pictures segment was one of the reasons Sony still posted an operating profit of 68,548 billion Yen on revenue of 8,215,880 billion Yen.

Sony recently cut its operating profit forecast to 290 billion Yen. That comes significantly down from the prior estimate of 320 billion Yen and well off of analysts earlier forecast off 341.7 billion Yen. The new forecast comes as the company sees weaker demand for its cameras in smartphones. Full year earnings will be reported on April 28th.

Shares of Sony are up 7% in 2016, but I see a fall coming after fourth quarter earnings. I think shares could fall back down to the $22 level depending on how bad guidance is. Remember, movies aren't the main revenue or earnings driver here, but are an important piece to the puzzle and could provide extreme upside to other underperforming segments.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in DIS over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.