Stock of the Day - March 2, 2009 - MVL

Marvel Entertainment (MVL)

Marvel Entertainment (MVL) has the rights to around 5,000 characters in the United States, including Iron Man, The Incredible Hulk, Spider Man, Captain America, The Fantastic Four, X-Men, Ghost Rider, and many other famous superheroes and villains that we grew up with.  The company is split into four sections: Licensing, publishing, toys, and film production.

Marvel, which is currently trading in the mid-$24 range, has a 52-week high of $38.50 and a 52-week low of $23.28.  The company, which released 4^th quarter earnings about a week ago, had a great 2008.  For the full year 2008, revenue increased by 39% and earnings climbed 54%.  In the 4^th quarter alone, Marvel doubled last year’s 4^th quarter earnings of $0.35 a share to earn an analyst-beating $0.80 of profit per share! This increase in 4^th quarter profit was mostly due to amazing Iron Man DVD sales.  The entertainment company continues to impress, as this was the sixth consecutive quarter that Marvel has beat analysts’ earnings estimates. 

The best way for a company like Marvel to beat estimates and to continue making huge profits is by coming out with blockbuster movies.  In 2008, the company released two very successful summer blockbusters in Iron Man and The Incredible Hulk.  Both of these movies brought in a ton of money from box office sales and also from DVD sales.  Marvel has also changed its movie-making strategy recently, as it has started to finance and produce its own movies instead of licensing them out to other companies.  While the risks are higher because it is using its own money, the rewards are greater because it can keep all of the profits. 

Having said this, 2009 will be a very troubling year for Marvel, and I believe that you should hold off buying Marvel for now.  I say this because the pipeline of movies for 2009 is extremely weak.  “X-Men Origins: Wolverine” is the only Marvel movie set to release in 2009, but Marvel sold the producing rights to 20^th Century Fox, so it will only get a fraction of the movie’s profits.  For a company that relies heavily on its income from blockbuster movie releases, 2009 looks very grim.  Analysts are expecting drastically lower 2009 earnings of $1.30 a share when compared to the company’s current EPS of $2.61.   If the EPS did drop to $1.30 and the share price remained at $24.35, it would result in a P/E ratio of 19, about double the current P/E of 9.3.  With the weak product line coming out in 2009, there is no real reason to believe that investors will be fine with paying 19 times earnings.  Thus, I believe the stock price for at least the first half of 2009 will fall. 

But, the long-term prospects for Marvel look great!  With Iron Man 2 and Thor coming out in 2010, and Captain America and The Avengers expected to hit the big screens in 2011, Marvel is looking at an amazing revenue stream that will last for a very long time.  What makes these upcoming movies even more enticing for Marvel investors is the fact that Marvel will be producing and paying for these movies instead of licensing them out.  As a result, Marvel will reap 100% of the profits made from the box-office sales and the DVD sales. 

With over 5,000 characters under its name, Marvel has a firm grip on the very lucrative superhero genre.  Even after the four movies that it is coming out with in 2010 and 2011, Marvel has a plethora of very famous characters that it can continue to produce movies based on in the future.  Superhero movies have been some of the biggest box-office hits in the past few years, and with so many characters to work with, Marvel is looking at a goldmine of film revenue.  Marvel’s films are very appealing to many demographics, and the company’s movies continue to pack theaters and continue to sell DVDs at high rates. 

There is no doubt that the product line for Marvel will be weak in 2009, and the stock price will probably reflect that.  But with around 5,000 characters that are marketable, with four blockbusters coming to theaters in 2010 and 2011, and with a very stable financial situation, Marvel looks to be a company that is set to grow for many years to come.  I would highly suggest holding off on buying until the 3^rd or 4^th quarter of 2009 after the stock has pulled back due to the weak EPS numbers.  But, the future looks bright for Marvel, and I think it will be a great stock to own for the future!

 

Niki Pezeshki

College Trillionaire