Star Wars Ancillaries, Not Ticket Sales, Are The Real Deal For Disney Stock

  • Star Wars:The Force Awakens is all set to break Box Office records.
  • Most investor attention will be on the film's ticket sales.
  • But it's the ancillaries, including merchandise and consumer goods sales, where Disney will make the most money.

For many Walt Disney (NYSE:DIS) investors, Star Wars is the company’s white knight that will breathe new life into Disney’s film business, and go a long way to alleviating the cable worries the company is facing. Although Disney’s cable revenues are still growing, investors are worried that heavy subscriber losses by ESPN (many analysts think that the fear is overblown), its largest cable network member accounting for 75% of cable revenues and a third of Disney’s corporate revenue, will eventually pull the whole company down. Any form of respite at this point will count for much, and right now Star Wars seems to be Disney’s big bet.

Star Wars is an old franchise dating back to the 1970s. But its staying power has been second to none: Star Wars theme remains amongst the most popular by any film company. And it keeps getting better for Disney. The latest Star Wars, launched on December 18, is eliciting plenty of positive ink, already. The film was smash hit on the box office on the first day. Star Wars is estimated to earn more than $100 million on first day and around $200 million by the weekend, breaking previous Box Office record set by Harry Potter And Dethly Hallows: Part II. Inspite of all these good news, Disney stock sank around 4% on the concerns that Disney will face punitive actions from antitrust regulators.

Analysts and industry observers had predicted Star Wars: The Force Awakens to set new Disney and industry records. According to Marty Brochstein of International Licensing Industry Merchandiser Association:

"to my memory, the level of activity surrounding this film launch has never been seen in Star Wars history or with any other movie franchise."

Most investor attention is currently focused on Star Wars ticket sales, which are usually the easiest to track and the most frequently reported. Star Wars has already rolled out to rave reviews, and has even prompted some analysts to hike their earlier revenue estimates.

Goldman Sachs is one such analyst that had hiked its Star Wars revenue estimates after the preview. The analyst estimates Star Wars: The Force Awakens will gross $2B in ticket sales, far out-earning The Avengers’ $623 million record set in 2012. That figure will qualify as the third-highest gross of all-time.

While that figure appears impressive, the real coup will be in Star Wars merchandise and related ancillaries. Estimates are that Star Wars will pull in as much as $9 billion for Walt Disney once you throw in the ancillaries. Star Wars merchandise is expected to draw as much as $3B in 2015 alone, and $5B over the next 12 months, far surpassing ticket sales. That figure might appear huge, but not when you consider that Adobe has said that websites selling affiliated products have received 15 million visits between September and November.

Disney recently ratcheted up royalty rates on Star Wars products to 20%, about double the normal rate. The company’s Star Wars partners including Hasbro, CoverGirl, Electronics Arts, Kay Jewelers, Lego, Rubie’s Costume Company, among others will now have to pay double the normal rates for using Star War themes in their toys. But it’s not like these licensees are complaining at all. These companies have already expanded their line of Star Wars products to include merchandise that is traditionally targeted at girls including things like Stormtrooper necklace and a ‘‘Dark Side’’ mascaras.

Apart from standard film merchandise, video games that use the Star Wars theme could add another $1.5 billion to Disney’s top line, while other media such as digital copies and DVDs, as well as television licensing are expected to bring in about $1 billion to Disney.

Forget about shorting Disney stock, for now

Disney is among the top 5 most shorted stocks on the Dow Jones. But with this kind of backdrop, it’s rather risky trying to short Walt Disney stock. As I explained in this article, if Star Wars turns out to be the massive success it’s widely expected to be, then the shorts will start rushing to cover, which will inevitably push the stock higher.

Moreover, I explained that Disney has a number of other big tailwinds including opening a giant theme park in China in 2016. So while the company’s cable worries are not about to disappear, the investing world is much more likely to focus on the company’s blockbusters such as Star Wars. So forget about shorting the stock, at least for now.

Brian Wu Brian Wu   on Amigobulls :
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  • I do not have any business relationship with the companies mentioned in this post.
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Comments on this article and DIS stock

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According to Forbes's value of brands (2015) ESPN is only worth ~$16 billion, Disney already has a cinema lineup and merchandise in place for the next decade that will make them at least $50 billion. Any money Disney loses from adults over sports they will get back from adults through their kids. Disney planned for this back in 09' when they acquired Marvel (and then SW to go with Pixar). ESPN is old news.
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