How These Summer Blockbusters Could Affect Your Portfolio
Ah, the summer movie season -- it's like the third date. Things have been building up to this for a while now. You've done the research, and you're excited. The closer it gets, the more nerve-wracking it becomes. But part of you fears the disappointment. In the end, you have some winners and you have some losers. The difference is, you can move on (hopefully) unscathed from a bad date, but when a film studio sinks shareholder money into a flop, you feel the pain long after that awkward moment.
We're midway through the summer, and we have probably already experienced the big flop of the season. It's Disney's John Carter. Disney (NYS: DIS) sank hundreds of millions ($250 million for the film itself and roughly another $100 million for marketing) into the sci-fi thriller about what audiences have described as "something." No one knew what the film was about, and almost nobody saw it. Disney is looking to take about a $200 million hit on the film, which would make it one of the biggest losers of all time (even including the underappreciated Kevin Costner film Waterworld).
Luckily for Disney, and for its shareholders, the studio also put out The Avengers earlier this summer, which earned Disney a cool $1 billion and likely more as time goes on. The JohnCarter failure would have ruined a smaller, less diversified studio for at least the year, but Disney has its hands in too many pots to be put down by one seriously awful film. The company has Marvel comics as its eternal moneymaker, along with Pixar and distribution rights for Dreamworks.
As far as stability goes, Disney may be a good pick for risk-averse investors.
Comcast (NYS: CMCSA) and its NBCUniversal arm have had a similar box office record to that of Disney. On the downside, Universal poured money into Battleship, a film that sank faster than the Bismarck and earned a sad $55 million after three weeks in theaters. It was an expensive lesson -- the lesson being board games don't lend themselves to being blockbuster films. The only exception I can think of is Clue, which was truly phenomenal.
But Universal struck a win in June with Snow White and the Huntsman. The film cost $170 million to make and earned the studio nearly $100 million in its opening weekend. The guaranteed cash cow Men in Black III quickly earned Universal another box office win.
The summer is far from over for Universal. The fourth Bourne film, The Bourne Legacy, should do well if audiences are OK with not having Matt Damon in the film. Ted, the first film by FamilyGuy creator Seth MacFarlane, already surpassed the $50 million mark in its first weekend, which is how much it cost to make.
Now, Comcast is such a behemoth of a company that one or two good films will not send the stock skyrocketing, but it's nice to know the guys at Universal know how to pick their summer blockbusters.
A lion's appetite
The smallest studio in our story is Lionsgate (NYS: LGF) . The former object of Carl Icahn's corporate raiding whet investors' appetites with the megahit The Hunger Games. A year or two ago, no one wanted to touch the financially sour studio, but it has done remarkably well since then. The two-year return on the company is a delicious 112%, while the one-year is even more impressive at 119%. When Icahn was trying to get his hands on the company, he was offering in the $7 range for what is today a near-$15 stock. Good move, Lionsgate shareholders and management, good move.
Lionsgate is not solely in the movie biz. The studio owns a good portion of the hit series Mad Men, which has earned the company a nice return for the six seasons it has been on air. Lionsgate also puts out the Tyler Perry Madea films, which always do well in theaters.
Lionsgate is cheaper than Disney or Comcast on a forward P/E basis, though is more vulnerable to a flop than either of the larger conglomerates.
Box office ticket sales are on the rise, which bodes well for studios, theater companies, and the horribly underpaid celebrities who star in the films.
Any of these companies may be good short-term holds, as the pipeline looks decent, but be careful when holding a company like Lionsgate for the long term. A series of bad films can send a company of that size cascading back down to takeover territory, where I am sure Carl Icahn is waiting with a machete.
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At the time this article was published Fool contributor Michael Lewis owns none of the stocks mentioned. You can follow him on Twitter @mikeylewy. The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services have recommended buying shares of Walt Disney. 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.
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