Movie Hits Are No Bonanza For Disney’s Stock Effect Of Blockbusters Is Diluted As Company Gets Bigger And Bigger

Will “Toy Story” be the next “Lion King”?

That’s a popular question in Hollywood, but investors might be wise to ignore the hype.

“Lion King” royalties added $1 billion to Disney’s bottom line. That includes a roaring $765 million in box-office sales, a $240 million operating profit from video, hundreds of millions in licensed merchandise - T-shirts, toys, plush animals - and added ticket sales at Disney theme parks.

“Toy Story” entered the jungle last week. If it has “Lion King” potential, what could it do for Disney’s stock? And what if Disney scores big on another Hollywood sleeper?

Better be careful, analysts say.

Wall Street still likes Disney after its pending $19 billion merger with Capital Cities/ABC, in part because Disney looks to cover every segment of the movie market this Christmas.

But analysts see Disney as a long-term investment rather than a stock you can make a big killing on.

“The company will be so big after the (Capital Cities/ABC) merger that even a mega-hit will not have much significance in the short term,” says Ian Link of Franklin Funds in San Mateo, Calif. “You might get a dollar or two in a psychological pop when a movie proves a hit, but that’s going to be eaten up by commissions or unrelated market moves if you are turning the stock over quickly.”

Historically, that’s proved to be the case.

Looking at Disney’s last five big animated releases, starting with the “Little Mermaid” in 1989, short-term players would have lost money more often than not, even though all the films were considered hits.

For example, if you purchased Disney stock on the first trading day of the month in which “Lion King” was released, your investment had lost 2.3 percent plus selling fees two months later.

A short-term play paid off best for the June release of “Pocahontas.” Your 10 percent return would have doubled the performance of the Standard & Poor’s 500 Index in the same period.

Still, “Pocahontas” was not the obvious hit that “Lion King” was or “Toy Story” looks to be.

Trailing “Lion King,” “Beauty and the Beast” and “Aladdin,” “Pocahontas” did $141 million in domestic box-office sales.

If you can’t participate in a single movie’s box-office bonanza, does it still make sense to purchase Disney shares?

“Disney is a terrific buy,” says Jeffrey Logsdon of Seidler Cos. in Los Angeles. “I see Disney as unquestionably the premier and predominant entertainment company in the world.”

With colorful stock certificates that feature endearing characters from Mickey Mouse to Tinker Bell and Winnie the Pooh, Disney long has been a favorite investment gift for children and grandchildren.

About 69 percent of Disney’s registered shareholders own 25 shares or less, making it one of the most widely held stocks in the United States.

An investor might not be able to cash in on one feature such as “Toy Story,” but over the long term you can play the cumulative effect of hit after hit, Logsdon says. Each hit film brings a new stable of characters to the Disney pantheon. That animates Disney video, merchandise and theme park sales, burnishing the long-term price performance of the company’s stock.