San Diego Comic-Con 2015: What Does It Mean for Investors?

As Comic-Con wrapped up last weekend, moviegoers are sitting on the edge of their seats waiting for the next flick to thrill them once again.

Since its $4 billion acquisition of Lucasfilm in 2012, Disney (DIS 1.54%) has been looking forward to binging on the profits that will likely flow from another Star Wars motion picture. And while Disney also has the superhero space tightly under wraps with Marvel, Time Warner (TWX) and DC Comics are looking to develop their own blockbuster superhero universe.

A full transcript follows the video.

 

Sean O'Reilly: We're nerding out because of Comic-Con, on this consumer goods edition of Industry Focus.

Greetings, Fools! I am Sean O'Reilly joining you here from Fool headquarters in Alexandria, Va. I am joined today by the one and only Vincent Shen. How are you?

Vincent Shen: I'm doing very well, Sean. Comic-Con. This is going to be a very fun episode.

O'Reilly: You happy?

Shen: Oh, yeah! I saw some of the footage and all the news that came out of the event over the weekend. It's very exciting. A lot of cool stuff like movies, and it's great that we can tie it into some investments and stocks like Disney, Time Warner, stuff like that.

O'Reilly: In the interest of full disclosure, we did not get to go. We are not that well connected as it is extremely difficult to get in there, but we nevertheless watched everything on YouTube. A bunch of movies -- none of them were Avengers-related. I guess that movie just came out, but I do want to talk first bout the major movies that came out, and then we'll bring it back around.

This is The Motley Fool -- we do care about investing -- bringing it back around to the companies that are responsible for these major movies. First and foremost, we'll deal with the biggest possible movie for this year, which is Star Wars: Episode VII.

Shen: That's what I want to talk about the most, to be honest.

O'Reilly: I'm more than happy to devote a lot of time to that.

Shen: The numbers behind that franchise ...

O'Reilly: I do have my Batman T-shirt on underneath this.

Shen: I have my Superman shirt, so it's okay.

O'Reilly: Good. What did you like most about the Star Wars panel?

Shen: I think, honestly, no title in movies has built up this following over generations. The originals came out in the late '70s, early '80s and then you had this generational leap with the three newer films that George Lucas released. Now it's been 10 years and you have this other movie with another jump, and the buzz and hype that has been building up behind this film. What they did at the event to fuel that even further at the event is incredible.

O'Reilly: Which included bringing out Harrison Ford.

Shen: Yeah. Bringing out a bunch of the original cast. Mark Hamill, Harrison Ford, Carrier Fisher; having a lot of the new cast there. Then at the end of their event, showing this behind the scenes footage that I personally loved.

O'Reilly: It wasn't a preview, but it wasn't a behind the scenes thing. It was a mix.

Shen: It covered -- they spoke to the cast and things like that. After all that, bringing the entire crowd of people -- thousands of people out -- for a free concert where they performed Star Wars-related music with the San Diego symphony.

O'Reilly: The orchestra, yeah.

Shen: Fireworks in the air; they really went all out for this. I think Disney understands how important this title is for them this year, ever since they purchased Lucasfilm back in 2012.

O'Reilly: I always marvel at the brilliance of that move, because now they can have Star Wars rides at Disney World.

Shen: We'll get to that.

O'Reilly: Yes, the synergies.

Shen: Next one that I see here that I want to talk about is, of course ...

O'Reilly: Batman V. Superman: Dawn of Justice. They actually brought out the whole cast. There were lots of jokes. You had Jeremy Irons, Ben Affleck, Henry Cavill; we got our first glance at -- and I apologize if I butcher it -- Gal Gadot.

Shen: I think that's it.

O'Reilly: I apologize if it's wrong, if you're watching my Motley Fool podcast, Gal. You saw her in the trailer that they showed -- awesome -- and there were a lot of doubters a couple months ago about this movie. I think this trailer silenced a good chunk of them, although, I've met a few people that aren't still quite sure what's happening, including you.

Shen: The problem is, with the whole DC universe, you've seen how well Disney and Marvel have been able to monetize their intellectual property there, and they've turned it into this blockbuster franchise. At this point, they're at 8+ movies. The Avengers movies come out each year -- and the Iron Man movies, Thor -- every year they come out, they're the top five, top 10 highest-grossing films of the year.

Having everything connected, you're basically building on what is a proven idea and popular franchise with viewers. With DC they've had this great success with the Christian Bale Batman series, and now they're trying to ...

O'Reilly: Well, Superman Returns in the later 2000s was awful.

Shen: Another lone movie, and now I feel this Batman V. Superman movie is the first build out of that writer universe, where characters from different movies get pulled in together like they do in Avengers, and I think that's where the big potential is for this franchise.

O'Reilly: That's the big money because it's 90% guaranteed you'll make a bunch of money if you have these connected films where you're going in a direction and this will lead us to some kind of Justice League type Avengers rip-off type movie later in the decade, or early 2020.

Shen: Oh, absolutely. I'm sure they have a 10 or 15-year plan for their releases just like Marvel did setting up each release of either an Avengers-style movie or individual new heroes. We have Ant Man coming out this weekend.

O'Reilly: I don't know if you saw the preview. It was so funny. Supposedly Ant Man is the funniest Marvel movie, critically.

Shen: I've heard as well that the reception's been good. Alright. Let's move on.

O'Reilly: Moving on. You had Deadpool, which supposedly stole the show. I was not there, but I had multiple commentators in podcasts that said Deadpool's trailer with Ryan Reynolds is the crudest -- F-bombs everywhere. That stole the show; the preview and Ryan Reynolds coming out. Yet, another Marvel movie.

Shen: This one is coming from Fox, but overall Deadpool is a Marvel character. Again, you can see how Disney's got its fingers in everything. I think Star Wars and Deadpool actually came out with the most positive buzz, and well-received panels at Comic-Con. That's a really exciting release. I think it's coming out next February.

O'Reilly: Yeah.

Shen: I'm personally really excited for that as well. After the Star Wars wears off ...

O'Reilly: You can simmer for a month and a half and then ... Quentin Tarantino did a panel with his new film coming out: The Hateful Eight, which is another western. I'm hoping he sneaks a samurai sword in there somehow. I'm a big Kill Bill fan.

Shen: I've not heard as much about this one.

O'Reilly: This was the other Marvel film. They obviously didn't have a panel for anything "Avenger-y". There was no Thor; they didn't have any of that. Marvel did still present a few things including X-Men: Apocalypse, which is the climax of their X-Men series. They had a huge panel, they had a preview -- even though it's going to come out in a year. They had Hugh Jackman, Jennifer Lawrence; they were all there. I'm not a huge X-Men person.

I didn't see Days of Future Past even though -- as I understand it -- that was a terrible mistake on my part. We'll talk about this in a bit, but we were talking about how it's very smart to have all these movies connected because then you have built an audience and you just mint money. That's important because Star Wars: Episode VII, Batman V. Superman: Dawn of Justice; these have over $200 million budgets.

Shen: Including the advertising and marketing budget we're at hundreds of millions of dollars for each of these films.

O'Reilly: You can't blow that.

Shen: It's funny. When you think about these blockbuster films before you look at the global box office receipts and you're like "Wow! $300 million, or $500 million" ...

O'Reilly: But they spent half that.

Shen: You look at the budget now and see how much they spent on marketing and you're like "Was this really that profitable for them?"

O'Reilly: Right. I have young son, so I pay attention to this sort of thing, but even that Minions movie -- which wasn't critically well-received -- made $115 million in its opening weekend. It beat Inside Out even though critically it's better. It's just because it has every kid in America [obsessed] over those little yellow guys.

Shen: It's an established character from the Despicable Me franchise. The last one was Suicide Squad. Again, another superhero focused [movie].

O'Reilly: And this is DC's other offering.

Shen: Yeah. This is going to build into that universe as well, I'm sure. Big cast, I thought the trailer looked great. I think it will be really important for Time Warner. We can talk about it in a little bit

O'Reilly: That trailer was interesting to me as well because during the panel they had Will Smith who's playing an assassin -- I can't remember the guys' name. You had Viola Davis from How to Get Away with Murder, but she's playing Amanda Waller. She's basically a government type leader who assembles these villains of the DC universe together to be a task squad to do some good.

Then if they screw up "Well, they're bad guys. They're supposed to." There's plausible deniability there. You had Margot Robbie from Wolf of Wall Street. She's playing Harley Quinn, the Batman villain.

Shen: It's a great cast.

O'Reilly: Yeah. Of course, you saw Jared Leto as The Joker for the first time, sounding very Heath Ledger-ish.

Shen: Yes. Very creepy.

O'Reilly: Last but not least -- we didn't do any financial data for these guys, but we're about to move on to the business side of things -- but you also had Warcraft.

Shen: Yeah, I actually had not heard of that.

O'Reilly: It has a Lord of the Rings feel to it. You basically have a bunch of orcs fighting.

Shen: Did they have any information on what they're expecting release timing to be?

O'Reilly: It's going to come out next summer.

Shen: Okay.

O'Reilly: It's going to be a year, may or may not be a franchise. It kind of depends on the financial returns this thing gets. I was very curious because we talked about how Blizzard makes a ton of money off their eight to nine million users each month on World of Warcraft, the video game. $10 a month on that service, but it's slowly ticking down in the usage, and I'm wondering if this will reignite that, or anything along those lines.

Shen: I'm sure if they make this into a big tent pole film and it does well, that's going to put plenty of interest in the video game franchise as well.

O'Reilly: For sure. Very good. We're going to move on to the business side of things because we're obviously investors, and if you want to get in on the action, this is what's going on with these companies.

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Moving on, there are three companies that are going to benefit from all these movies. You have Disney which is ...

Shen: In my opinion, the one that has really done a great job under Bob Iger bringing itself into the modern era.

O'Reilly: Synergizing.

Shen: Everything they release in the theater trickles down into their other segments, through their consumer products and things along those lines. Just to give you an idea; the studio entertainment segment at Disney makes up about 15% of their revenue. That's picked up a bit recently, and it's about 12% of their operating income. They enjoy a 21% operating margin. That's pretty profitable.

O'Reilly: It's pretty profitable, but it's not outlandish.

Shen: Yeah, but you have to keep in mind now -- we've been talking about Star Wars, and I was thinking "How can we really predict, or get a feel for the amount of money the film which is the first of three, I'm sure, will create?"

O'Reilly: Take what those things made, adjust it for inflation, tack on another 30%; that's how much it's going to make.

Shen: In total, the previous six films have generated about $4.3 billion in box office receipts. That's very impressive. We're talking a multi-billion dollar franchise.

O'Reilly: That's not adjusting for inflation because it was the 1970s.

Shen: Really, when you look at it holistically, it's not just the movies, but the video games, the toys. I like to bring up the toys because that is actually the biggest piece of the pie. There are estimates out there that overall, the Star Wars franchise has generated about $27 billion total from DVDs, TV shows; everything. The biggest chunk of that was $12 billion in licensing for the toys with Hasbro.

O'Reilly: Wow.

Shen: There have been two main generations -- the original toys that released with the first movies, then from the mid-90s, through 2000s which were the second generation. Guess what? There's going to be a whole new release. Hasbro has already showcased some of the toys they're coming out with.

O'Reilly: I'm sure, yeah.

Shen: With The Force Awakens, and it's exciting. Like we said, that will flow through to their parks, Bob Iger has talked about how he's really focused on releasing some very impressive, epic Star Wars related rides throughout the parks and resorts segment.

O'Reilly: Would you like to vacation on Tatooine, Vince?

Shen: That would be awesome. Right now the stock is trading at about 23 times their 2015 earnings, they're also paying a 1.1% dividend -- not expensive, in my opinion as Disney is a dominant name in media, if not the dominant name in media ...

O'Reilly: If you had to pick a company that would be here in 100 years ... I was actually surprised at how, obviously Disney is a bit pricier, but the other two companies that stand to benefit from this are 21st Century Fox, and Time Warner. Time Warner owns DC, Batman, and Superman. They're all in the same valuation ballpark. 21st Century Fox trades for 20x forward earnings for this year, estimated; Time Warner's at 19; Walt Disney is at 23.

The returns on equity are weird because you never know what's going to happen from one year to another in terms of entertainment and box office. However, the returns on equity for these guys ranged from 9% to 19%. Good, not great. Obviously the best and most consistent one there is Disney. They pretty much make 15% to 17% returns on equity every single year, no matter what.

Shen: To wrap that up -- the way I look at that comparatively between these three big companies -- they have a lot of impressive titles announced at Comic-Con. I feel like Disney has diversified every title between their segments. Obviously you have to keep in mind that the movie has to be successful in order to drive toy sales, or video game spinoffs, or anything along those lines.

Assuming there's modest success, and they're able to move into these other segments, there's a reason why Warner Brothers studio makes up about 45% of the revenue.

O'Reilly: It's much bigger.

Shen: The movie needs to do well. They also release more titles; around 21 to 23 titles per year. They have already had at least 10 of those be related to the DC universe. At Disney we're talking about 15% of revenue just from the films, but when you branch that out into everything else, it's a more significant percentage. It's also a bit more diversified. I also think that there's definitely some risk with these companies overall.

The valuations aren't sky high, and they're old companies who've been doing business for a long time. People love movies, but when you are basing so much of that performance on roughly nine films a year, or five films a year as Disney has, if you have one big flop that you've invested a lot into -- hundreds of millions, as we discussed with the budgets ... John Carter of Mars, for example. Massive write-offs with that a few years ago. There is definitely volatility.

O'Reilly: That did flop. I forgot about John Carter.

Shen: There is that inherent volatility when you're depending on this handful of titles doing so well each time.

O'Reilly: As a Foolish investor, I think it's pretty clear that Disney is the more ...

Shen: For me, personally.

O'Reilly: I can't argue. I'm more of a DC than a Marvel guy, but as a Foolish investor; Disney is [the one]. It is staggering how smart they are with what they do.

Shen: What I would leave off with on that is, Bob Iger ushered Disney into this modern era with all these properties, moving away from only animated films, into superhero films. Now even with Star Wars, with sci-fi flicks. The stock has done incredibly well. People think he has done a great job leading the company.

He was supposed to retire in 2016, but I think that scared investors. So he pushed it off to 2018, but it's still something to keep in mind for the long-term horizon -- which is what we like to follow -- when he retires, finding that management transition is going to be [...] In my opinion, it's almost the same level as when Steve Jobs passed and the reigns passed on to Tim Cook. It's that significant.

O'Reilly: Yeah. It is a big deal. Very good. Well thank you for your thoughts, Vince.

Shen: Thank you, Sean.

O'Reilly: Can't wait to go to the movies. And if you are a loyal listener and have questions or comments we would love to hear from you. Just email us at [email protected]. Again, that's [email protected]. As always, people on this program may have interests in the stocks that they talk about, and the Motley Fool may have formal recommendations for or against those stocks. So, don't buy or sell anything based solely on what you hear on this program. That's it for us, Fools. Thanks for listening, and Fool on!