Can "Transformers: Age of Extinction" Transform Viacom Stock?

Optimus Prime is back in Transformers: Age of Extinction. Source: Paramount Pictures, a Viacom company.

In 2014's biggest opening weekend to date, Paramount Pictures' Transformers: Age of Extinction topped the charts with $100 million in U.S. box office receipts and $301 million worldwide. Shares of Paramount parent Viacom (NASDAQ: VIAB  )  stock rose about 1% late Sunday, following the release of estimates.

That isn't surprising, of course. Transformers is one of Paramount's biggest franchises for the filmed entertainment group, which accounts for about one-third of company revenue. What's more, shares of Viacom stock have more than tripled the return of the S&P 500 since the first Transformers movie openedin summer 2007.

VIAB Chart

VIAB data by YCharts.

Transforming a company
How important are Hasbro's giant robots to Viacom's movie business? Very, especially now that Paramount, like its peers, is making fewer films than it used to.

But don't take my word for it; look at the difference between 2011's results and those of the two years since. Having Transformers: Dark of the Moon in the mix three years ago made a difference, which you'd expect from a movie that earned more than $1.1 billion at the worldwide box office:

Filmed Entertainment
Fiscal 2013
Fiscal 2012
Fiscal 2011

Theatrical revenue

$1,239 million

$1,310 million

$2,175 million

Films released

13

15

16

Transformers movie?

No

No

Yes

Sources: SEC filings.

Iron Man: Almost as important as Optimus Prime
Can we expect the company to get back to 2011 revenue and profit levels with the release of Transformers: Age of Extinction? Not if Viacom's SEC filings are to be believed. Walt Disney's 2010 repurchase of distribution rights to Marvel Studios films has taken a toll on the competition:

"Lower revenues from our 2012 releases were principally due to the difficult comparison against our 2011 release of Transformers: Dark of the Moon and Marvel's Thor and Captain America: The First Avenger," according to a note on page 46 of Viacom's most recent 10-K annual filing.

The message? Not only did we fail to release a new Transformers movie in 2012, we also missed out on profiting from Marvel's The Avengers and Iron Man 3, and every other Marvel Studios movie since then. An expensive mistake by any measure.

Originally, Paramount had agreed to distribute all Marvel films in exchange for a lucrative producer fee amounting to 8% of the gate. But the studio in 2010 sold the rights back for $115 million, missing out on a potential $218.7 million payday for The Avengers and Iron Man 3 alone. Add in Thor: The Dark World, Captain America: The Winter Soldier, and the dozens more Marvel Studios movies we'll see between now and 2028, and it's possible that Viacom gave up billions. Whoops.

So while the Transformers franchise is no doubt important and remarkably lucrative, investors need to consider other catalysts. At least one -- the Marvel distribution deal -- has gone missing, taking with it hundreds of millions in potential revenue and profit.

Now it's your turn to weigh in. Have you seen Transformers: Age of Extinction? Do you expect the movie to deliver big profits and drive up Viacom stock in the process? Leave your take in the comments box below.

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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 July 14, 2014, at 9:40 AM, TMFMileHigh wrote:

    Fools,

    This is from reader Tony Roth:

    Whoops, indeed. The author should have done his homework before accusing Paramount of squandering billions on its deal for the Marvel Studios films. Paramount had only a 5-picture deal, and had already distributed 3 of them before relinquishing rights to Disney. (What's this 2028 about?) And $115M was just an up-front advance against the 8% distribution fee on the last 2 films, which Paramount got to keep just for sitting back and doing nothing - pure profit. No fools there, Motley or otherwise.

    For more accurate info, see Disney's The Avengers a winner for Paramount too: source - http://www.reuters.com/article/2012/05/07/entertainment-us-a...

    My reaction:

    >>The author should have done his homework before accusing Paramount of squandering billions on its deal for the Marvel Studios films.

    I did, and the point remains. Paramount could have easily chosen to negotiate a new deal with Disney but didn't. Getting pure profit on the back two of its five-picture deal -- which included all but The Avengers -- doesn't make what the studio did a smart move, it just confirms the missed opportunity.

    FWIW and Foolish best,

    Tim

    --

    TMFMileHigh in CAPS and on the boards

    @milehighfool on Twitter

    http://about.me/timbeyers

    http://timbeyers.me

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