by Jonathan Berr | January 23, 2014 9:18 am
When Disney (DIS) announced last year that it would take a $190 million write-off after The Lone Ranger bombed at the box office, some pundits, myself included, wondered if Disney had lost touch with film audiences. After all, the House of Mouse had fired Rich Ross last year in the wake of John Carter, another failure for Disney stock.
But what naysayers — including me — forgot is that Disney is one of the most creative companies in Hollywood, and can bring hits to the market from just about anywhere.
The animated tale Frozen is a case in point. Frozen is loosely based on a Hans Christian Anderson story that tells the story of two princesses, one of whom is cursed by a spell that turns everything she touches into block of ice. There’s also a lovable snowman named Olaf and a dog-like reindeer named Sven. Add a splash of romance and betrayal to keep parents engaged, and Disney has created a classic for years to come, not to mention a winner for Disney stock.
Thanks in part to the animated tale, Disney stock has spiked more than 41% over the past year, outperforming Time Warner (TWX), which has jumped about 29% and Viacom (VIAB), which has gained 37%. DIS stock is up 7.7% since the film was released — almost triple the performance of the S&P 500 in that time.
Disney stock trades at price-to-earnings ratio of about 21, a premium to Viacom’s 17 and Time Warner’s 15.72. However, Disney’s revenue growth is superior, forecast at 7%. Analysts expect Time Warner sales to jump 2.4% and Viacom to gain a measly 0.1%. Given those numbers, DIS stock is worth buying now before the hype around Star Wars makes it too pricey.
Wall Street was heartened that the company has been able to extend its lucrative princess franchise. The performance of Frozen, praised by both critics and and fans, has unbelievable.
According to Box Office Mojo, the film has generated more than $763 million in worldwide box office grosses since its November release, and was the fourth-highest grossing movie in the U.S. for 2013. The web site estimates that the film cost about $150 million to produce, so Disney stock has already made its money back multiple times over.
Frozen has already outgrossed other family fare such as the four Ice Age movies, which have grossed more than $729 million, the two Despicable Me movies which have grossed $619.6 million and the four Alvin and the Chipmunks films, which have grossed $576.9 million.
According to Deadline, Frozen will probably be the highest grossing Disney animated film in history and, as Deadline puts it, could “be their Billion dollar baby.” That’s a threshold that the film could easily hit. Media reports have indicated that Frozen will follow Aladdin and The Lion King to the Broadway stage. And we’re talking about Disney, here, so don’t ever forget the merchandise revenues.
People who don’t have young kids may not realize the power of the Disney Princesses brand, and the effect it can have on Disney stock. During my family’s recent trip to Disney World, I noticed that most girls under the age of 10 were dressed like a princess. There is an amazing array of merchandise out there to cater to that market. My niece, who is two, has an entire dresser full of princess dresses, along with tiaras, sheets, toys and other Disney princess-themed merchandise.
Disney is a master at making the most of merchandising opportunities. Take the Star Wars property as the most recent example. The company is already integrating George Lucas’ masterpiece into its other franchises. At Disney World, I saw R2d2 Mickey Mouse ears and an action figures of Kermit the frog dressed at Luke Skywalker. The company’s ability to spew out popular merchandise is practically limitless, which should help propel Disney stock higher.
Investors shouldn’t buy Disney stock just because of Frozen, because the good news regarding the movie has already factored into the stock price. What makes Disney stock worth owning is the company’s knack for creating movie franchises loved by people of all ages, and making a ton of money in the process.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.
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