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Summer Movies Bring a Boost to Content Kings

21 July 2015 in Trading Ideas

The country’s big media conglomerates probably don’t need reminding why they got into the movie business. If they did, however, the recent box-office numbers and industry buzz would likely be useful.

This past weekend, Disney struck gold again with its latest release based on a character from its Marvel Comics roster—Ant-Man, starring Paul Rudd, was the top-grossing movie in the U.S. and Canada, reeling in about $58 million at the box office—Marvel’s 12th consecutive first-place opening.1 Overseas, the 3D movie, which received strong reviews, took in an additional $56.4 million.

The movie delivered the lowest opening total in North American for any movie directly produced by Marvel President Kevin Feige, but its worldwide haul should easily eclipse the film’s $130 million cost to make.

However, don’t feel bad for this weekend’s No.2 – Minions, produced by Comcast’s Universal Studio, collected $50.2 million, for a two-week domestic total of $216.7 million.

As for behemoth Time Warner, a wave of optimism surrounded not a recent release, but a future one that may give box-office records a run in early 2016. The company released a three-minute-plus trailer of its Warner Brothers-produced Batman v Superman: Dawn of Justice at last week’s Comic-Con convention in San Diego to great enthusiasm.2

These strong showings have seemingly contributed to benefit the company’s investors, too. Shares of Disney, Comcast, and Time Warner make up more than 52 percent of the weighting of the Content is King motif, which has gained 1.7 percent over the past month. In that same period, the Standard & Poor’s 500 has risen 1 percent.
Over the past 12 months, the motif has increased 5.7 percent; the S&P 500 is up 7.6 percent.

Of course, all three of these companies also have the cushion of diversification. Disney, for example, operates other content franchises, including the ABC and ESPN networks, as well its theme-park business (the company just announced last week it would open a Disneyland in Shanghai).

That well-rounded strength was recently echoed in a bullish JPMorgan analyst report. The analysts reiterated that Disney continues to be their “top pick” in the media sector for its “consistent content execution and earnings strength.”3 Not to mention that this favorable report followed what the analysts called a “weak” performance by the movie Tomorrowland, to the tune or a $100 million financial impact.

But JPMorgan said it expects earning strength elsewhere in the company, which it says is set up well to “continue its robust outperformance through its unrivaled global content portfolio,” especially as it begins to see revenue from the upcoming movie in the Star Wars franchise this September.

Comcast, of course, is the media conglomerate known less for its content creation (Comcast sports networks, NBC Universal) than as a traditional provider of cable television and broadband Internet access.

And while many see Comcast’s traditional cable operations at risk of diminishing in the wake of “cord-cutters” who are leaving cable TV plans, others see the potential for the company to expand its grip on its customers.

Last week, Comcast announced a new video streaming service that will allow its broadband subscribers to get basic broadcast TV channels, plus HBO, and a cloud-based DVR service for an extra $15 a month. Comcast is the first broadband provider to launch such a service.4

While $15 a month seems like a steal–that’s what it costs to just subscribe to the new HBO standalone streaming service–adding the cost of a basic Comcast broadband plan brings the total outlay to about $82 a month. In comparison, Comcast’s own Internet Plus TV package offers broadband, local TV channels and HBO for an initial 12-month rate of just $45 a month.

Ultimately, as more television goes digital, traditional media companies are going to find differing levels of prosperity. A recent report by S&P Credit Analyst Naveen Sarma maintained that long-term success will come to those with four key traits: “strong, well-defined brands that translate across both traditional TV and online alternatives; limited exposure to second- and third-tier cable networks; less dependence on full-sized video bundles; and willingness to let vulnerable networks fail.”5

“Successful media companies must, in our view,” Sarma wrote, “move away from their bundle strategies and focus on their key brands and networks.”

Among Sarma’s potential winners: Walt Disney, Comcast and Time Warner. The three are the largest weighted holdings in the Content Is King motif, at 19.8 percent, 16 percent, and 16.7 respectively—about three times the weighting of the 17 other equities in the basket.

1 Barnes, Brooks, “Ant-Man, a Small Superhero, Does Big Business at the Box Office,” New York Times, July 19, 2015.

2 Mendelson, Scott, “‘Batman V Superman'” Comic-Con Trailer Should Have Been Its First Trailer,” Forbes, July 13, 2015.

3 Levisohn, Ben, “Disney: Why JPMorgan is Still Bullish,” Barron’s, July 10, 2015.

4 Gottfried, Miriam, “Comcast’s Streaming Service Could Push Customers Back to Cable,” Wall Street Journal, July 13, 2015.

5 Stone, Amey, “S&P Picks TV’s Winners and Losers,” Barron’s, July 13, 2015.