Disney Just Became a Screaming Buy

In TV and film, franchises are rare. Writer and director Joss Whedon has already created two in the television version of Buffy the Vampire Slayer and its long-running spinoff Angel. With better luck, he would have had a third in Firefly.

Soon, he'll get a shot at creating another.

Walt Disney (NYSE: DIS  ) subsidiary Marvel Studios has booked Whedon to write and direct the sequel to this summer's billion-dollar blockbuster, Marvel's The Avengers. Here's how Disney chief executive Bob Iger explained the deal in last night's conference call with analysts:

When Marvel took the stage at Comic-Con last month to announce the new slate of films that will keep the momentum going, the reaction was huge. Iron Man 3 opens on May 3, 2013 followed by Thor: The Dark World in November of next year. Captain America: The Winter Soldier will be in theaters in April of '14, and as I mentioned in our last call is the sequel to Marvel's The Avengers in the works. In fact Marvel has just signed Joss Whedon to exclusive deal and he will write and direct Avengers 2 and help develop a Marvel based series for ABC.

Notice the scope of this arrangement. While Iger isn't explicitly saying so, Whedon is being handed a large measure of creative control over the on-screen future of Marvel characters. Is that a reason to buy Disney now that the stock has reached a new 52-week high? Absolutely. Here's why.

I got your leverage right here, pal...
Serializing is what made The Avengers such a success. Marvel gave itself five films to build up the characters into a known commodity for moviegoers who might not be comic book fans. And Whedon, as a writer of both television series and comic books knows better than most how to map out a plot that unwinds slowly and with purpose.

He's also a fan of comics and knows the Marvel Universe. Don't believe me? Check out Morgan Spurlock's documentary Comic-Con Episode IV: A Fan's Hope, which features Whedon talking about his love of the medium. Or you could head to comiXology and pick up digital copies of the acclaimed 24-issue run of "Astonishing X-Men" he wrote for Marvel.

As a franchise builder, my guess is Whedon is already asking Iron Man 3 director Shane Black about his plans for that film in order to make the Avengers 2 a comprehensive sequel. I'd expect similar conversations with Alan Taylor, who's leading the Thor sequel, and Anthony and Joe Russo, who've signed on to bring Captain America back to the Big Screen in Captain America: The Winter Soldier.

Or perhaps I'm being presumptuous. Either way, Whedon is far too smart (and too proven) to overlook what's come before in creating a follow-up. Witness Serenity, the 2005 sequel to the unfortunately short-lived Firefly television series (yes, I'm a fan), which received critical acclaim for allowing familiar characters from the TV show to grow and advance themes and plots introduced in the series.

Big Pictures produce big numbers
For investors, the practical effect of this style of working is that it can make the whole greater than the sum. The Avengers has taken in more than $3 billion in worldwide box office receipts if you count up the six films as a series.

About half of that is attributable to Whedon's film, which helped Disney's studio division generate $313 million in operating profit during the just-completed fiscal third quarter -- up more than 500% year-over-year and equal to about 10% of Disney's aggregate operating earnings for the period.

A series of successful Marvel franchises for both film and TV could further boost the studio division's contributions, increase overall margins, and help Disney grow earnings much faster than the 12.5% annualized rate Wall Street is expecting.

Peers know it, too. It's why Time Warner (NYSE: TWX  ) is stretching Peter Jackson's take on J.R.R. Tolkien's The Hobbit into a three-film series. Lions Gate (NYSE: LGF  ) has a four-film plan for cashing in on author Suzanne Collins' best-selling trilogy. The finale, The Hunger Games: Mockingjay, will be released in two parts.

Like a tech stock, except different
Disney differs in that it isn't just prolonging a known story. Think of it as similar to Apple's (Nasdaq: AAPL  ) strategy. By giving its different products and software a similar look and feel, the company entices Mac owners to buy iPads, iPhones, and related accessories. Combined, it's an ecosystem that continues to produce billions in annual profits.

Video game publishers take a similar tack. Take Activision Blizzard (Nasdaq: ATVI  ) , which issued higher full-year guidance last week because of gamer enthusiasm for upcoming titles and a strong reaction to the third installment in the company's Diablo franchise. Create a worthwhile, immersive experience and audiences will always come back for more.

With great power comes great profits
With Marvel building valuable new franchises to complement its crown jewels, Disney looks like a powerhouse stock worth buying and holding forever. Similarly, given the incredible performance of Apple's product lines, you could argue that it's earned that buy-and-hold status as well. With a new iPhone and iPad expected to be only months away, as well as the potential for an Apple television in the future, there are plenty of reasons to be excited about the company for the long term. Read all about these opportunities, as well as the key threats facing the company, in our brand-new premium research report on Apple. It comes loaded with a full year of updates, too, so make sure to click here and grab a copy today.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Apple, Time Warner, and Walt Disney at the time of publication. Check out Tim's web home, portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Apple, Activision Blizzard, and Walt Disney. Motley Fool newsletter services have recommended buying shares of Walt Disney, Activision Blizzard, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a synthetic long position in Activision Blizzard. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (7) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 10, 2012, at 10:18 AM, FoolishLonghorn wrote:

    So instead of buy-low/sell high, we are going with buy high/sell higher?

    Disney is a huge business. Marvel-based movies represent a small fraction of their business. They also own Pixar studios, which has failed to match its stellar success of the past with their most recent releases, Cars 2 and Brave. While Avengers was a great film, John Carter was a real bomb, and that was all of 5 months ago.

    And then there is ABC/ESPN, the resorts and theme parks, their online business, and their gaming business.

    To declare Disney a screaming buy, after a big run-up this year, based on just Marvel pictures momentum, is nuts. This is more of a fan-boy article than a financial analysis.

  • Report this Comment On August 10, 2012, at 11:09 AM, TMFMileHigh wrote:

    @FoolishLonghorn,

    Thanks for writing. Let's tackle each issue one at a time.

    >>Marvel-based movies represent a small fraction of their business.

    While this is technically true, we've had only one Marvel picture distributed through Buena Vista (the legacy deal with Paramount prevents Disney from keeping distro rights).

    This will no doubt grow in the years ahead, allowing Disney to capitalize on owning the top-selling movie franchise of all-time:

    http://www.boxofficemojo.com/franchises/?view=Brand&sort...

    >>They also own Pixar studios, which has failed to match its stellar success of the past with their most recent releases, Cars 2 and Brave.

    Cars 2 was a disappointment but Brave has been a winner, netting $342 million worldwide as of this writing. Blu-ray and digital sales should add a nice kick:

    http://boxofficemojo.com/movies/?id=bearandthebow.htm

    >>John Carter was a real bomb, and that was all of 5 months ago.

    John Carter was, indeed, a bomb. And yet studio operating profit is still up 28% through the first nine months of the fiscal year.

    >>To declare Disney a screaming buy, after a big run-up this year, based on just Marvel pictures momentum, is nuts.

    You're misreading the piece. The argument is that franchises dictate returns for a business like Disney, which gets to milk each winner for incremental profit via games, merchandise, rides, TV, and so on.

    With Whedon under contract, Disney now has someone with experience building franchises who is also deeply respected by actors. That's a huge win not yet reflected in Disney's share price, IMHO.

    >>This is more of a fan-boy article than a financial analysis.

    While I am no doubt a fan-boy, I think it's important to recognize how much fan-boys are driving entertainment spending lately. The annual San Diego Comic-Con now attracts more than 125,000 attendees annually.

    FWIW and Foolish best,

    Tim

    --

    Tim Beyers

    TMFMileHigh, Motley Fool Rule Breakers Analyst, Supernova Odyssey I Portfolio Contributor

    Web: http://timbeyers.me

  • Report this Comment On August 10, 2012, at 11:31 AM, ryanalexanderson wrote:

    Given Robert Downey Jr.'s perpetual sweetheart royalty deal vis-a-vis the Ironman character, I wish I could invest in him personally, based on this news.

    He should IPO himself. Think of the free cash flow!

  • Report this Comment On August 10, 2012, at 11:58 AM, hbofbyu wrote:

    I think we are in a comic-book movie bubble. Trends come and go. Disney animation was dead in the 80's until The Little Mermaid revival in 1989. Right now we are at the peak, and saturated with super-heroes. After the new Superman comes out there is nowhere to go but down. At some point it has to go dormant to be discovered again by the next generation. I'm not short on Disney but I am on the Marvel franchise.

  • Report this Comment On August 10, 2012, at 12:17 PM, TMFMileHigh wrote:

    @hbofbyu,

    Thanks for writing.

    >>I'm not short on Disney but I am on the Marvel franchise.

    I'll take that bet. You know why? There's a wide variety of comic book themed content that you already know about -- you just might not realize it came from a comic.

    AMC's "The Walking Dead," which originated as an Image Comics series, is a good example.

    There's also history to consider. We've been drowning in action movies for years, and every time we pay huge sums to see a hero vanquish a bad guy. Sometimes these guys have guns, sometimes they wear costumes. Either way, the theme has proven timeless.

    FWIW and Foolish best,

    Tim

    --

    Tim Beyers

    TMFMileHigh, Motley Fool Rule Breakers Analyst, Supernova Odyssey I Portfolio Contributor

    Web: http://timbeyers.me

  • Report this Comment On August 10, 2012, at 12:49 PM, BMFPitt wrote:

    The people who cancelled Firefly should get struck by lightning while being mauled by a bear.

  • Report this Comment On August 10, 2012, at 1:03 PM, TMFMileHigh wrote:

    @BMFPitt,

    >>The people who cancelled Firefly should get struck by lightning while being mauled by a bear.

    Alright. So I don't advocate violence against Hollywood executives, but I do appreciate the sentiment.

    Thanks for writing and Foolish best,

    Tim

    --

    Tim Beyers

    TMFMileHigh, Motley Fool Rule Breakers Analyst, Supernova Odyssey I Portfolio Contributor

    Web: http://timbeyers.me

Add your comment.

DocumentId: 1979713, ~/Articles/ArticleHandler.aspx, 4/20/2014 2:56:20 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement