Walt Disney On Course For Another Blockbuster Year

  • Walt Disney's films that the company has released so far this year are doing very well
  • This is being driven by strong domestic demand for good movies
  • The better-than-expected success of Disney's films could provide an unexpected boost to the company's growth and lift its shares even further.
Walt Disney Stock a buy

It appears that all the talk about Walt Disney (NYSE: DIS) having a subdued 2015 ostensibly because of difficult comps it set up for itself after a stellar 2014 might be unfounded after all. Disney’s entertainment segment did very well in 2014 after growing 22%, the fastest growth by any of the company’s segments. But, it appears that the company might pull off yet another year of stellar growth, if current indications are anything to go by. Walt Disney recently broke its own record when it managed to hit the $1billion mark in domestic box office revenue in just 174 days, besting its previous 188 days record to the mark.

Meanwhile, Disney shares are up 23% YTD, but could still have significant near-term upside potential.

Disney's Blockbuster Movies

The success of Disney’s Entertainment division is being driven by films such as Avengers: Age of Ultron, which has grossed $452.2 million; Cinderella ($200.3 million); Inside Out ($185 million) among other films. Disney is scheduled to release 13 major films this year, five of which have been tipped to become blockbusters. Disney’s domestic grosses have so far clocked $1.08 billion, a healthy 37% growth compared to last year, which could give the entire company’s top line an unexpected boost.

But, it appears as if the movie magic is not confined to just Disneyland alone. Many other domestic movie-makers have been having a banner year so far. Comcast’s (NASDAQ:CMCSA) Universal Pictures leads the pack with $1.38 billion in domestic grosses so far courtesy of the runaway success of Jurassic World ($500 million); Furious ($351 million); Pitch Perfect 2 ($181 million) and Fifty Shades of Grey ($166 million). Comcast’s domestic box office revenue is up an astounding 137% Y/Y. Warner Bros is not far behind and has seen its domestic grosses rise 16.7% YTD to $1.02 billion, thanks mainly to the roaring success by American Sniper ($348.8 million).

Comcast has so far released nine films while Walt Disney and Warner Bros have released seven and 13 pictures, respectively. This in effect means that Walt Disney’s pictures claim the prize for the best average gross per film YTD ($154.29 million vs. $153.3 million for Comcast). Walt Disney has for a long time played second fiddle to Comcast when it comes to getting the best returns for the dollars it sinks into its pictures. We do not have the production budgets for all the movies released by the two companies so far so we cannot make a definitive conclusion that Disney has finally overtaken Comcast in the operational efficiency department, but this is something that cannot be ruled out. Many movie goers still avidly remember how badly Walt Disney’s Lone Ranger flopped when it hit movie theaters around the same time as Comcast’s Despicable Me 2 back in 2013. The two films had long been slated by industry pundits to become mega hits. Walt Disney had pinned a lot of hopes on the Lone Ranger and bet the farm by sinking $220 million into the film but never broke even. In contrast, Comcast sunk in just $76 million into Despicable Me 2 but got a return of almost 400%. Many investors became disgruntled with Walt Disney’s blockbuster strategy where it routinely sinks huge sums into a few bets each year. But the company’s long-term record in the movie-making industry suggests that this strategy is not a dud after all.

Good Times Ahead for Disney

But, the best part is that Walt Disney still has six more films slated for release during the year. Walt Disney has significantly ramped up its movie production rate in recent years, and this seems to be working in its favor. The company had lined up 13 films for 2015 compared to just six movies in 2013 and nine in 2014.

Perhaps one of the reasons why Walt Disney’s films are doing so well can be chalked up past trends. Historical trends suggest that Disney is superb at creating great sequel potential from movies with well-known story lines and characters, but often struggles with unproven commodities. Many of the movies the company has scheduled for release this year fall into the former category, which increases their chances of success. Then there is the case of a rising tide lifting all boats. It appears as if Americans are enjoying going out for movies more than they did before.

I expect the better-than-expected success of Walt Disney’s movies to provide a 1.5%-2.5% boost to the company’s expected top line growth. Surprise top line or earnings beats by strong margins usually have considerable upside potential. Investors should continue holding Walt Disney stock.

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