Investors Are Paying More Attention to Cartoons This September Than Kids

When I was a kid, September meant school (boo!) and a new slate of Saturday morning cartoons (yay!).

I was a cartoon junkie for a few years as a boy, and my parents allowed it as they worked all the overtime they could and I think these few hours was the only peace they got all week.

Cartoons have now become Big Business – actually, a HUGE business – witness the US$4 BILLION that toy maker Hasbro (HAS-NYSE) just paid for London-listed Entertainment One (ETO-LSE), a studio that got its start in Toronto, Canada. The fact that a TOY company paid for this studio makes perfect sense – because the merchandising of these brands is where all the money is in animation. The deal worked out to about 22x leading Earnings-Per-Share.

Yes, a studio can get strong licensing revenue for their shows around the world in TV and mobile rights.  But the way the industry has moved is – the real BILLIONS is in the merchandising. That’s why having the IP – the Intellectual Property – around a cartoon character is key.

I would argue the biggest piece of value in that transaction is for a children’s cartoon character, Peppa the Pig. Peppa is worth a rumoured $1 billion a year in revenue to E-One. To give you an idea on how important this is to Hasbro, they have a $5.2 billion market cap and paid $4 billion for Entertainment One.

“There’s nothing like the power of a family brand,” says Tim Gamble, a director of Thunderbird Entertainment (TBRD-TSXv) in Vancouver BC.

Gamble and Thunderbird have made a big commitment to animation in hopes of finding The Next Big Cartoon Character that will resonate with kids and become a phenomenon. Think Harry Potter – now a multi-billion dollar franchise. 

Their animation division, Atomic Cartoons, is a Tier-1 animation supplier, producing several series for streaming services like Netflix and Disney. The CEO of Thunderbird, Jennifer McCarron, came up through the animation side.

This September, Thunderbird has several new animation series airing:

Molly of Denali – Sept 2 on PBS & CBC

Curious George Movie – Sept 10 on HULU

The Last Kids on Earth – Sept 17 on NETFLIX

Jurassic World – Sept 14 on NICKELODEON

101 Dalmatians – Nov 12 on DISNEY PLUS

Donald Duck & The Three Caballeros – Nov 12 on DISNEY PLUS

Hello Ninja – Nov 1 on NETFLIX

As investors ignore the stock – and to be fair, analysts are forecasting EBITDA to be flat YoY here in 2019 – the management team has prepared themselves for A Big Win if one of their new shows takes off.

The most prospective for TBRD investors is called Last Kids on Earth, which comes from the highly successful book series by Max Braillier. Think of it as Diary of a Wimpy Kid meets The Walking Dead.  

Netflix aired the one-hour special on September 17, with a commitment to show a season of shows starting in March 2020. 

Thunderbird owns the IP to the show, which means they get most of the merchandising revenue. There are some big-name voice-overs in the show, like Mark Hamill of Star Wars fame.

IF this show gets high ratings, is downloaded or streamed A LOT this fall – then the Street may get a sense that the “merch” revenue from this IP could be quite lucrative – and provide a compelling reason to buy the stock.

Nobody really knows when a character will “hit” with a family audience, so waiting for the Market reaction to Last Kids on Earth – well, it’s a pretty big IF.

When I say that Thunderbird is prepared for success, I mean that they have a full merchandising plan that they will roll out in the spring of 2020 as the series starts its inaugural Netflix run.  

Everything is ready to go – the Market just needs to see if kids & families buy into it and make it a success.

Two years ago, Netflix saw where the Big Money in the streaming industry was going and started beefing up their merchandising business. They have a global Consumer Products Team now, headed up by former Disney exec Christie Fletcher.

The real juice for investors in this sector has evolved. Now it’s about securing the IP rights to already successful brands like Last Kids On Earth. I am sure the authors of all the hit children’s books are inundated by studios like Atomic trying to get deals done.

I would point out that there’s only 46.6 million shares out, 51 million fully diluted at Thunderbird. There’s lots of leverage here for investors with a tight share structure.

The streaming industry is getting a large boost this fall as Disney’s service comes online. It will be a direct competitor to Netflix and all the other services. Disney is removing all their content from those competitors, which is creating a content vacuum that should only fatten the margins of Tier-1 suppliers like Thunderbird. 

So I am expecting this to be a popular sector for investors – they just need to see some good numbers show up on quarterly financial statements.

These large streaming services like Disney & Netflix etc are willing to share IP – which includes merchandising revenue – to Tier-1 studios like Thunderbird to produce their shows. 

So even though Thunderbird didn’t come up with or develop the idea or the IP to a cartoon character, they may negotiate a piece of the IP to produce it.

There’s no competition for the stock right now, but one of these animated series turns into A Big Hit, that will change.

It’s September – and I’m as interested in cartoons this year as I was when I was a boy (just for different reasons!). It’s a clean slate for TV execs and TV audiences. Somebody will be a big winner. It could be TBRD.