Movies and the financial markets

The Walt Disney Company NYSE:DIS

Market Cap: $191.6 billion | Exchange: NYSE | Index: Dow Jones, S&P 500

The Walt Disney Company’s entertainment empire is worldwide and world famous, and movies form a major part of that success. As well as its own productions, Walt Disney has purchased three movie studios in recent years: Marvel Entertainment, Pixar and Lucasfilm.

Since its opening the Force Awakens has been a stunning success for Disney but this hasn't been replicated on the stock market. Chris Beauchamp, senior market analyst, has been examining why this is the case.

"Broader market turmoil has trumped the stunning success of Star Wars, with Disney’s shares knocked back along with the rest of the US stock market. In fact, we should not be surprised that the market has not rushed to mark up Disney shares, since the runaway popularity of Star Wars meant that it would have been more surprising had the film flopped [insert disparaging reference to ‘The Phantom Menace’ here].

Unsurprisingly, despite Star Wars’ popularity, the film hasn't picked up too many Oscar nominations. Investors in Disney should look on the franchise as a steady earner, and not a flash in the pan. With more to come from the franchise, it is fairly certain that this money stream will remain healthy."

Before the release of The Force Awakens, Chris took a look at the performance of the company behind the film.

“Long-term Disney shareholders have enjoyed one of the biggest rallies of the past few years, with the price increasing 226% since late 2010 versus a 75% gain for the S&P 500. Thus, the 1% bounce in the share price following the release of the latest trailer for Star Wars Episode VII will have been of little importance for those with a longer view. However, it underlines how important the new trilogy is expected to be for the firm.

It is not just Star Wars either. A series of successes with big titles such as Frozen and Captain America: The Winter Soldier helped to send revenues up 8% in FY 2014, while profits rose 21% to $13 billion.

Crucially, while the overall performance of the industry is expected to be strong this year – with box-office collections expected to move past $11 billion, benefiting Comcast, Lions Gate and others – it is Disney that combines strong business performance with a compelling valuation. While the overall earnings multiple for the industry sits at 38.8, Disney trades at just 22 times earnings, with growth currently running at 10.5%.

In the past six quarters, Disney has beaten expectations by around 10%. We can expect the addition of the Star Wars films, plus the merchandising and theme park rides that come with it, to help maintain this performance. The Force, it seems, is with them.”

IG analyst Alastair McCaig says: “The ultimate success of [The Force Awakens] will be down to toy sales. The Force Awakens has the backing of Disney, LEGO and Hasbro, which should ensure merchandising sales outweigh box office returns and, equally importantly, produce a steady flow of new fans growing up along with these new films.”

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