The world of film entertainment saw one of its biggest blockbusters last week in Walt Disney's Avengers: Infinity War. The superhero movie smashed many records to become the highest grosser in the first week of its release (hauling in US$250 million on opening weekend in North America), the fastest to cross the US$1 billion mark (in 11 days), and the biggest earner of all time on its global opening (US$630 million).
The third iteration of the Avengers franchise is the testament to the enduring appeal of cinema and the ability of legacy film production houses to withstand the onslaught of rapidly evolving personal technology and disruptive new forms of streaming content and its digital delivery.
Last year was a bumper year for the industry as U.S. ticket sales netted a prodigious US$11 billion while the global revenue hit a record US$40 billion. As emerging market share of box office earnings expands and an impressive line-up of big-budget movies are set to hit the screens, this year is expected to be another year of record earnings.
For investors, this is a clear reflection that the more than 100-year-old industry continues to grow and adapt and is able to draw in crowds. Media and entertainments juggernauts are eager and able to compete with deep-pocketed digital rivals with a multitude of other forms of distractions jostling for consumer time and dollars.
| Walt Disney Co. | ||
| Ticker: | DIS | |
| Current yield: | 1.58% | |
| Forward P/E: | 14.6 | |
| Price: | US$102.29 | |
| Fair value: | US$130 | |
| Value: | 21.3% discount | |
| Data as of May 15, 2018 | ||
Media behemoth 
Walt Disney (DIS) produces motion pictures under the Pixar, Marvel and Lucasfilm labels and owns and operates media networks (ESPN, ABC and Disney Channel), television production studios, theme parks and resorts, and other assets.
The House of Mouse is having a blockbuster year with back-to-back smash hits in Avengers: Infinity War and Black Panther that have each reeled in more than US$1 billion, securing a spot among the 10 highest-grossing films ever in the history of Hollywood. Disney, in fact, accounts for 17 of the 34 movies in the super-exclusive US$1-billion club. The company recently reported second-quarter sales of US$14.55 billion, up from US$13.34 billion a year ago, chiefly boosted by its movie-studio business whose revenue jumped 21% to US$2.5 billion.
The record-breaking collections of Infinity War and Black Panther have already pushed Disney past the US$3 billion mark at the global box office in 2018 with two more Marvel movies lined up: Ant-Man and the Wasp, due out later this year, and Captain Marvel, in the first quarter of 2019.
The wide-moat company's media networks and Disney-branded businesses possess tremendous pricing power. The Disney Channel, a leading children's network, allows the firm to introduce and expand its film and animation content portfolio. "The stable of animated franchises will continue to grow as more popular movies get released by the animated studio and Pixar, which has already generated hits such as Toy Story, Cars and Frozen," says a Morningstar report.
Similarly, Disney's Marvel universe has created a series of film franchises and product tie-ins that have bolstered both revenue and dominance in a highly competitive landscape. "Recent success with the Pixar and Marvel franchises has helped to create new opportunities with adults who may have outgrown their attraction to the company's traditional characters," says Morningstar equity analyst Neil Macker, who pegs the stock's fair value at US$130.
| Comcast Corp. Class A | ||
| Ticker: | CMCSA | |
| Current yield: | 2.06% | |
| Forward P/E: | 12.7 | |
| Price: | US$31.77 | |
| Fair value: | US$42 | |
| Value: | 24.4% discount | |
| Data as of May 15, 2018 | ||
The owner of Universal Studios, Comcast (CMCSA) is the largest U.S. cable operator with its networks reaching 56 million homes. The company also operates numerous national and regional cable networks (USA, MSNBC and CNBC), theme parks and a film studio under the banner of NBCUniversal, a leading media and entertainment company.
Comcast is pushing to bulk up to compete in the increasingly aggressive battle for content. The company is reportedly preparing to make a US$60 billion bid, which it recently sweetened with a further US$2.5-billion break fee, for the media assets that Twenty-First Century Fox has agreed to sell to Disney for US$52 billion. The move, in addition to a separate US$30-billion Comcast offer to acquire the 61% of Sky not owned by Fox, could potentially reshape the global media landscape.
Universal Studios racked up a record US$4 billion last year on the back of global hits The Fate of the Furious and Despicable Me 3. The studio has to its credit two out of 10 highest-grossing movies ever: Furious 7 and Jurassic World. The studio has a rich line-up of high-profile releases for 2018 including Jurassic World: Fallen Kingdom and Skyscraper.
"NBCU's deep stable of content can still be monetized via distribution agreements with third-party providers of streaming video on demand and over-the-top providers," says Macker, who assesses the stock to be worth US$42.
Although leading digital players such as Netflix and Amazon Prime now have similar production budgets as legacy media companies, "it will take a long time for their content libraries to match the depth and breadth of traditional players," he adds, assuring that NBCU's content has a long runway of demand growth.
A strong film slate and continued theme park strength could help the wide-moat company tide over challenges in the cable and broadcast TV businesses, says Macker.
| Twenty-First Century Fox Inc. Class B | ||
| Ticker: | FOX | |
| Current yield: | 0.97% | |
| Forward P/E: | 16.6 | |
| Price: | US$37.09 | |
| Fair value: | US$43 | |
| Value: | 13.7% discount | |
| Data as of May 15, 2018 | ||
Twenty-First Century Fox (FOX) is a diversified media company that produces and distributes movies and TV shows and owns assets including a film studio, broadcast television including the Fox network in the U.S., and global cable networks. The company also owns nearly 40% of Sky, Europe's leading entertainment company.
The Fox studio has earned the distinction of making the highest-grossing movie ever in the history of Hollywood, Avatar (2009), a record it still retains with global lifetime takings of US$2.78 billion, as of January 2018. Avatar is joined by two other Fox films that are part of the exclusive billion-dollar club: Titanic and Star Wars: Episode I - The Phantom Menace.
Fox owns robust film franchises and a strong television production studio, both of which will remain key revenue and profit generators as the value of quality content and demand continue to grow, says a Morningstar report. Macker attributes the firm's sustainable competitive advantage, or wide moat, to its worldwide cable networks, as well as its film and television studios.
"The filmed entertainment segment generates a number of hit television programs (Modern Family and Homeland) and movies (superhero film Deadpool and the Mission Impossible franchise) annually," says Macker, whose fair value estimate for the stock is US$43.
Fox News remains the market leader as one of the 10 most-watched cable channels. The media conglomerate's cable business posted its "highest earnings ever" in the third quarter, clocking a 10% year-over-year growth. The company owns rights to the NFL, MLB and other sports, which provides an important platform for showcasing content as broadcasters are the only outlet to reach almost all 116 million households in the U.S. "The combination of original programming and exclusive sports rights will allow Fox to sharply increase its revenue from retransmission fees and reverse compensation in the near future," Macker notes.
