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The Honolulu Advertiser
Posted on: Sunday, November 11, 2001

Firms hope Potter means profit magic

By Matt Krantz
USA Today

Put your magic wand away. You don't have to be a wizard to invest in the upcoming Harry Potter movie.

Harry Potter is cute. But is he bankable?
Several publicly traded companies, ranging from movie rights' owner AOL Time Warner to makers of toys, candy and video games, are hoping for a bit of magic when the much-anticipated movie is released Friday.

"There are exceedingly good things coming from the movie; not just the box office, but the tie-ins," says James Goss, analyst with Barrington Research.

Until now, there haven't been many ways for investors to play the Harry Potter phenomenon. Scholastic, the book publisher with rights to the boy wizard's first four tales by author J.K. Rowling, was the only bet.

Shares of that company levitated 25 percent during the fiscal year ended May 1999, the year the first Harry Potter book hit shelves, bringing in $4 million in revenue for the firm. The success of the Harry Potter books has ballooned since then and generated $200 million in revenue last year for Scho-lastic.

And investors will finally get their chance if the movie "Harry Potter and the Sorcerer's Stone" finds fans beyond those who have bought the 51 million books in print in the United States.

Expectations are high, with analysts hoping for a record $75 million in its debut weekend, says Doug Mitchelson of Deutsche Banc Alex. Brown.

That might be a drop in the cauldron for AOL, which last year had $7.7 billion in revenue. But AOL's pact to make movies based on the seven Potter books (four in print, three yet to come) could bring it nearly $10 billion in revenue, says Gordon Hodge, analyst with Thomas Weisel.

Yet, investors should be careful, because despite the hype, the effect on some companies is still relatively minor.

And investors have gotten burned chasing popular culture before. Remember Pokemon? Despite several films based on the colorful monsters, kids have lost interest. That's been tough on companies, such as 4Kids Entertainment, which attracted investors based on being a Pokemon licensee. That company is expected to see its net income plummet 57 percent this year, says Arnhold and S. Bleichroeder.

Even so, investors looking to bet on Harry can consider the following:

• Scholastic. The publisher of the first four Harry Potter books is still the purest way to invest, but 2001 won't be a magical year. Rowling, rather than writing the fifth book, has focused on the movie. That's been bad news for Scholastic, which will only bring in $50 million from Harry Potter book revenue this year, down 75 percent from last year, says Brandon Dobell, analyst with Credit Suisse First Boston.

There's another uncertainty. Rowling hasn't signed a contract for Scholastic to publish her next book, "Harry Potter and the Order of the Phoenix," to be released next year. Ray Marchuk, vice president of finance for Scholastic, says Rowling has been pleased with the other books and hasn't indicated that she wants to change publishers.

• AOL Time Warner. Investing in AOL Time Warner is the most direct way to bet on the movie, but an upside to the stock due to Harry Potter will only occur if attendance comes in at the high end of expectations, Mitchelson says.

• Mattel. With the main license to Harry Potter, Mattel has released toys such as the Professor Snape's Potions Class. Already, Toys R Us is reporting strong sales. But even if Harry Potter is successful for Mattel, it still must make up for a nearly $125 million hit to revenue after its recently stopped making toys based on Disney movies, says Linda Bolton Weiser, analyst at Fahnestock.

• AMC Entertainment. "The Sorcerer's Stone" will be shown at 137 of the theater chain's 164 locations. But that doesn't mean fat profits right away. Analysts estimate that AMC keeps just 30 percent of box office receipts for the first two months of the film's run and 65 percent thereafter. For the film to pay off, its appeal must be lasting. AMC is betting Harry Potter's run will be long.

• Amazon.com. Booksellers such as Amazon aren't the best way for investors to bet on Harry Potter. It would take more than just one series of books to "move the needle" at Amazon, because the company posted $2.8 billion in revenue last year, says Shawn Milne, analyst with SoundView Technology. Cutthroat competition also is hurting booksellers, he says.

USA Today reporter David Lieberman contributed to this report.