Disney's Marvelous Bet on Superheroes

The Walt Disney Company (DIS) set its mouse ears on the biggest name in comic books in a purchase agreement that will bring all of Marvel Entertainment's (MVL) characters into the Disney fold. The $4Billion purchase agreement with Marvel is similar to Disney's previous $8Billion buy of animation powerhouse Pixar, which has already reaped dividends with film, toy and video sales of features Wall-E and this summer's hit Up.

Marvel, a newcomer in the movie production business, but with two self-financed films under its belt and another four in development is riding a high after the blockbuster success of Iron Man and the subsequent revenue tail that film has provided. With the eagerly anticipated sequel set to be an even bigger box-office draw, the opportunity was ripe and Disney went after it. Marvel's upcoming film slate looks like this:

=> Self-Financed films including 2010's Iron Man 2, 2011's Thor and Captain America films, and the 2012 team-up Avengers. But that's just the beginning, as a possible Incredible Hulk sequel, a S.H.I.E.L.D. or Nick Fury film and potential franchises from the core Avengers characters all lie in wait for initial movie-goer reaction.

=> Licensed films include Sony's 2011 Spiderman 4, upcoming Fox films Wolverine 2, Deadpool, X-Men First Class, and Origins Magneto, and there's talk in Hollywood circles about reboots to the Daredevil, Fantastic Four and Blade franchises.

The film slate at Marvel looks incredibly promising, so why sell out at $50/share? That's a question Marvel shareholders will get to ask as although both company boardrooms have approved the deal, the MVL shareholders must also give their permission. Given the profitability of the Iron Man movie franchise and the chance of a second hit with either Thor or Captain America, all moving towards the much-anticipated Avengers film, begs the question whether Marvel needed a big brother. Marvel finds itself in a very positive business cycle as its films generate interest in its comic books, which generate interest in more films and toys and videos, but I believe Marvel's thinking is growing ever-more global and it needs a partner to showcase its characters further around the world.

Disney theme parks with various Marvel characters and tailored rides, bigger opportunities in television for Marvel's growing animation team and the increased presence at the negotiating table for localized global expansion of movie, television and print properties give Marvel a cushion it didn't have before when it ventured on its own. But, most importantly, I think Marvel have watched and learned from the Pixar model, and as Pixar was embraced into the Disney fold, it has been allowed to run and create as it had before and even more so. Critically, the last two Pixar films have been labelled as the least commercial and least accessible, and still among its best to date. In the end creativity prevailed, and just as the Pixar model has taught Disney, Marvel knows that its love for its own characters and creative process will be left with the creators and not a corporate conglomerate.

Prior writings at WC Power Tech Fund about Marvel, here (Link), here (Link) and here (Link), with the premier of Iron Man and beyond, talked about how the strategy was very sound and the stock could easily double from its $2-3Billion market cap within the next few years as it pressed on with its film strategy. That was around the $30/share range and Marvel admirably was able to withstand the market's recession wrath better than most, eventually faltered with the market but was quickly embraced again by investors at close around $38 at the end of last week. Now while this deal makes a lot of sense in many ways, Marvel should've been worth significantly more than $50/share on its own as its Avengers assembled.

Disclosure: Author owns MVL, DIS

Animation King Disney has Bright Future

Forever known as one of the pioneers of animation, Disney (DIS) has put management reshuffling behind it and now looks refocused and determined to deliver for shareholders. Current quarter earnings were a good indication that the strategy is working. Nearly all segments of the business looked good as Disney delivered $0.58/share vs. a year ago $0.51/share and the market expectation of $0.55/share. On the revenue front Disney reported $9.05Billion vs the expected $9.02Billion.

The biggest rise came from the television unit as ABC posted strong numbers led by lower production costs and higher ABC Studio sales, as hit shows like "Lost" continue to do well in several markets. ESPN also helped here and the company even stated that ESPN will recognize $185Million more in deferred revenue in the 4th quarter than last year.

In its theme park segments Disney saw increases of 6% in revenue and 13% in operation income. These numbers were particularly strong as attendance gains were seen even as an increase in ticket prices more than offset rising gasoline prices. Management even went as far as to say that margin improvements were seen and the theme park business is very strong.

The movie division was down year-over-year due to strong DVD sales from the prior year, however with movies like the 3rd "Pirates" and "Ratatouille" coming to DVD for the holiday season there's reason to be optimistic that the movie business will be strong in the coming quarters. Disney made the big animation splash when it purchased Pixar, then became the first studio to offer movies for download on iTunes, and it is this management vision that Bob Iger brings that was lacking in years past when the company was run by Michael Eisner. While Pixer's latest film "Ratatouille" is doing well at the domestic box office, the foreign nature of the film's subject matter should propel it to much larger returns in foreign markets than its predecessor "Cars". All reasons to smile as Disney regains its position as the studio for animated features.

Disney further expanded its online strategy as it purchased Club Penguin for as much as $700Million. Club Penguin is a virtual online world for kids and already sports as many as 700,000 subscribers. A nice addition to Disney's already growing stable of online properties.

With these latest numbers Disney sports a trailing P/E of 15 and a forward P/E in the low-mid teens. With the business growing in double digits, and it looks like this will continue into next year, the stock sports a PEG of around 1.1, which is very reasonable for this kind of media powerhouse. Analysts targets should be reaffirmed after this quarter and as the average estimate is around $40/share the 18% upside makes for a healthy risk/reward ratio.

With old favourites and a growing nest of new properties there's a lot of positives surrounding the house that Mickey built.

Disclosure: Author holds no position in DIS