« Company Presentations at the UBS Media Conference | Main | Trimming Central European Media Enterprises »

December 12, 2005

Disney's Movie Studio Suddenly Looking Good

The only presentation I heard from Disney (DIS) at last week's UBS Media Conference came from George Bodenheimer, who heads up ESPN. The story at ESPN is excellent with double digit average growth in operating income through 2009 as most costs and affiliate fees are locked in. Recently, ESPN has been a bright spot while the movie studio has been the company's Achilles heel. Now, less than a month after the studio reported a $300 million loss, things are suddenly looking up for the Studio Entertainment segment.....

Following on the heels of the success of DIS's first computer-generated animated film, Chicken Little, the company's attempt at establishing a multi-film, multi-year franchise from C.S. Lewis' Chronicles of Narnia series got off to a roaring start this past weekend. The Chronicles of Narnia: The Lion, The Witch, and The Wardrobe opened with a better than expected domestic box office of $67.1 million. Estimates I had surveyed centered around $50 million. The film had the third best opening of 2005, trailing only the latest Star Wars and Harry Potter flicks. Narnia also opened strong overseas with $42 million. BoxOfficeGuru.com also noted that the opening weekend compared favorably with the latest two Pixar films, The Incredibles and Finding Nemo which each opened with $70 million. Exit polls for the film were very favorable which might allow it to weather this coming week's opening of the extremely well-reviewed and certain blockbuster King Kong.

went on to earn $261 million in the U.S. and $369 million abroad, while Finding Nemo earned $339 million domestically and $525 million in international markets. The first Narnia film seems unlikely to match those numbers but a domestic gross north of $200 million seems likely with international numbers even higher. Most importantly, the $150 million gamble DIS made on the production costs for the film (and a marketing budget that probably reached at least $50 million) appears to have been a good bet. DIS now has a franchise to match Warner Brothers (owned by Time Warner) Harry Potter series and with seven books in the Narnia series the company likely has a blockbuster opening every December through 2011. Furthermore, a children's based franchise gets a multiplier effect at DIS due to the company's theme park and merchandising businesses.

Less than a month ago, the studio was causing great concern among DIS investors. Now, two consecutive hits make the studio's results for FY06 ending next September look very promising. Two more surefire hits are in the pipeline for next summer with the Pixar release Cars and the sequel to Pirates of the Caribbean. DIS's reliance on the suddenly mature home video market is still a concern but returns on recent theatrical releases have held up better than library catalogue and the next twelve months should see the four films mentioned in this note generate the sale of potentially 80 million DVD units. At $15 wholesale, that is $1.2 billion in revenue and, even on depressed margins, over $300 million in operating profits.

I think the back-to-back success of Chicken Little and The Lion, The Witch, and The Wardrobe set up DIS shares to finally move up towards my long-standing target in the low $30s. The studio, cable networks, ABC, and the theme parks all appear set for good results in FY06 and trade publications suggest the sale of the company's radio assets for as much as $3 billion could be announced anytime. DIS remains a long position across the entire Northlake client base.

Posted by Steve Birenberg at December 12, 2005 10:40 AM in DIS