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Summary

  • Disney's (DIS) Frozen has surpassed expectations, setting box office records and reinvigorating earnings.
  • The merchandising cash-cow is just starting to kick-in and could provide a dependable revenue stream for years to come.
  • With bankable assets like Pixar and Marvel adding a boost to revenues, Disney is a buy.

In the following article I will explain why Frozen's enormous box office surprise has me bullish on Disney (NYSE:DIS) in the long-term.

As a bit of background, the studio's 53rd full-length animated feature, Frozen has all the elements of the quintessential fairytale story that we've all come to know and love over the company's last nine decades.

Inspired by Hans Christian Anderson's fairytale, The Snow Queen, the adaptation tells the story of a loyal bond between two sisters, weaved together by bouts of adventure, fantasy, and of course, love.

Then there's the necessary yet still-loveable sidekick in Olaf to provide the comic relief, who many moviegoers and critics agreed stole the show.

Though these ingredients seemed awfully familiar, young kids and their parents flocked to see Frozen in theaters as if the Disney machine had reinvented the wheel.

In early March, Frozen surpassed The Lion King as the highest-grossing Disney animated film of all time. On top of that, the flick also passed Pixar Studios' Toy Story 3 as the most successful animated film in history, grossing over $1.09 billion to date.

Note: Although Disney owns Pixar, it operates independently of Disney's own animation studio.

Frozen is the latest in a recent run of so-called "comeback" animated movies which saw strong, profitable box office results for Disney, beginning with 2010's Tangled which grossed $591 million globally and was followed up by 2012's Wreck-It Ralph that generated a respectable $471 million.

Prior to that, Disney floundered in the animation segment, with forgettable efforts such as Treasure Planet, Home on the Range, Brother Bear, and Meet The Robinsons.

Pixar and Dreamworks Animation (NASDAQ:DWA) meanwhile have been dominating the market for much of the past decade or so with more appealing, computer animated films. Finding Nemo, Shrek, and Kung Fu Panda come to mind.

The late-eighties to early-nineties were arguably the last consistent stretch in which Disney truly had its finger on the pulse of box-office success, as titles like The Little Mermaid, Beauty and the Beast, Aladdin, and The Lion King were released to huge fanfare.

But now the Company can stop reminiscing about its past glory.

Frozen has once again made Disney attractive for investors... and has laid the groundwork for Frozen "the marketing machine" to take over.

And therein lies the real profit-making.

Money In The Bank

The Company spent $323 million to make, market, and distribute Frozen. But already, they've made back their money -- and then some.

According to estimates from analysts at SNL Kagan and Gabelli & Co., Disney stands to clear $1 billion in profits just on revenues from theaters, digital downloads, DVDs, and TV rights.

That number doesn't include one other key revenue generator that can't be predicted as accurately: merchandise.

Disney is far and away the largest merchandise licensing company in the world, and they can work their magic like nobody else.

Bloomberg reported that almost 500,000 Frozen dolls modeled after the two female lead characters have been sold to date.

Disney licensee Mattel, Inc. (NASDAQ:MAT) has sold well over $100 million Frozen-related toys.

And depending on whether Disney decides to turn Frozen into a franchise or pump out various spin-off projects, the merchandise revenue stream could last for years or decades to come (just think of how many Cinderella or Baby Simba dolls are still being sold at Disney Stores today).

Frozen is doing so well for Disney that analysts have boosted projections for the company in 2014.

Dan Salmon, an analyst with BMO Capital Markets, has given it a "buy" rating and raised his estimate for Disney's fiscal 2014 per-share earnings to $4.09 from $4.00. Salmon also predicts the movie division's operating income will rise 48% to $979 million.

Nomura Securities' analyst Anthony DiClemente recently stated that the success of Frozen could mean his previous $140 million estimate for the division's Q2 profit is too conservative.

Since the opening weekend of Frozen in late November, Disney's stock has climbed 10% to $78.48. It reached its all-time high of $83.65 in early March just as the film cracked the $1 billion plateau.

Upon the end of Frozen's theatrical run, if Disney can maintain the movie's momentum when it arrives on the small-screen, it will transition nicely into the Company's next big offering, Big Hero 6, in November.

It's an animated film based on Marvel Comics characters, and will be stylized after Japanese anime cartoons. The movie will be the first one to feature Marvel characters since Disney acquired Marvel Entertainment in 2009.

With both Pixar and Marvel being bankable assets (especially considering Marvel's latest movie, Captain America: The Winter Soldier, setting box office records for the month of April), and an in-house studio back on track, Disney appears to have all the makings of a solid run for the next few years.

Source: Disney: Why Shares Are Set To Go Higher