The movie studio didn’t even pull its weight, and yet Walt Disney Co (NYSE:DIS) was able to post a healthy gain in income that helped send Disney stock to an all-time high.
The solid quarter points to the benefits of this kind of concentrated entertainment conglomerate. When the movie business turns up soft year-over-year, results can be propped up by theme parks or branded consumer products.
And, indeed, in the most recent quarter, higher ticket prices and sales at the theme parks, as well as continued success selling Frozen toys, let Disney earnings match Wall Street estimates in a quarter with no blockbuster films. The television business also contributed to earnings growth in the quarter.
Those various revenue streams — and their cross-pollination — make Disney stock pretty attractive in normal times. Of course, these are not normal times — not when DIS is set to debut the first live-action Star Wars film in 10 years.
Additionally, the highly anticipated movie from the blockbuster franchise represents the inaugural effort for Lucasfilm as a Disney property. If it goes as well as expected, Disney stock could be headed for a torrid final quarter. After all, the second trailer has been viewed more than 200 million times, CEO Bob Iger told analysts and investors. That should make investors in Disney stock feel good about the company’s chances.
Equally important, even with Disney stock hitting record highs, it’s still not clear that the market has accounted for what could be the biggest blockbuster the franchise has ever produced. Some analysts believe Star Wars: Episode VII will land among largest blockbusters in box office history.
If the film does $2 billion in worldwide receipts — as some Disney watchers are predicting — it would be the third-biggest movie of all time. Only Avatar and Titanic grossed more than $2 billion at the box office.
Disney Stock at a Discount
Some analysts sees sales at much more modest levels, and that’s great for any new money coming into Disney stock. The more the market underestimates the success of Star Wars, the more likely DIS is priced for big gains as a result of the movie.
And it’s a very good bet that the latest Star Wars will do epic business. It’s the first film to be directed by fan-favorite J.J. Abrams — who successfully re-launched the Star Trek movie franchise — and it brings back members of the original cast.
Disney stock should start moving on anticipation well before then. Upside from Star Wars could begin as early as the third quarter.
Disney stock trades for 20 times forward earnings with a growth forecast of 15% per year. True, that indicates that some premium is being baked into shares, but probably not nearly enough.
DIS grew at an annualized rate of almost 20% over the last five years, helped by blockbusters like Frozen. It’s reasonable to assume DIS can continue to grow as such a rate if Star Wars does as well as the more optimistic estimates.
Heck, the broader market is more expensive than Disney stocks despite having half the growth forecast. This is a market of multiple expansion, and DIS will certainly get more as we head into the end of the year.
With the theme parks showing resilience in the face of a stronger dollar, and healthy contributions from consumer products and broadcast operations, the market should have no fear of DIS missing Street estimates.
If Star Wars is as under-appreciated as it seems, Disney stock — already up 18% for the year-to-date — could have at least another 15% to come.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.