I'm an unabashed MarvelEnterprises (NYSE: MVL ) fan. I'm not talking about the stock, though, or the current crop of comics. I'm talking about the 2,000 or so comics from the '80s stored away in my office. (No, really.)
I've got some classics, too. Remember when Jean Grey died in X2? I've got that issue of The Uncanny X-Men. Remember Jennifer Garner as Elektra? I've got her first appearance in the pages of Daredevil, by creator Frank Miller. I even pulled out one of my favorites -- Fantastic Four No. 250 -- in advance of the movie, which, sadly, I've yet to see. (I've got three kids. You tell me how to find spare time, OK?)
With all that, you'd expect I'd love this stock. "It's a Peter Lynch play!" you cry. You're right; I know Marvel. I've known the company for years. But that's exactly why I won't invest.
Let's start where my able opponent is likely to go: the Baxter Building, home of the Fantastic Four. As of this writing, Fantastic Four had brought in more than $280 million in theater revenue worldwide. That's pretty solid, and I'll admit it's much better than I expected. Merchandise sales should also be strong.
Still, it's instructive that while Marvel's latest flick has outperformed, the stock hasn't. The shares are down roughly 3% since opening day. No, I'm not suggesting you engage in ticker-watching. I'm simply saying that investors' expectations of Marvel have fundamentally changed.
Indeed, when David Gardner recommended Marvel to Motley Fool Stock Advisor subscribers back in 2002, the stock was languishing in the single digits. But Spider-Man had also just been released. The web-slinger went on to gross more than $800 million in his debut. That was followed by the hits X2 and Spider-Man 2. Not surprisingly, investors took notice.
The bar was set pretty low in 2002. It isn't any longer.
The hero's downfall
According to Marvel's investment thesis, there are nearly limitless ways to monetize its stable of 4,700 characters. Box office blockbusters like the Spidey movies bear witness to this idea. And now, the thinking goes, a new licensing deal with Viacom's (NYSE: VIA ) Paramount will allow Marvel to keep the bulk of future revenue from new films, a la billionaire Star Wars creator George Lucas. Excelsior!
Well, not so fast. This deal involves Marvel characters we haven't yet seen on the big screen. The X-Men? Out. Spidey? Nope, Sony (NYSE: SNE ) keeps the rights to that franchise. Even a solo star turn for perpetually angry mutant Wolverine, which will be produced by News Corp.'s (NYSE: NWS ) Fox, falls outside the new, sweeter arrangement.
What characters will be covered? First up are Captain America and secret agent Nick Fury. Both could do OK. Or not. I honestly think many of Marvel's characters aren't suited for the big or small screen. But that hasn't stopped the production machine. As this post on our discussion boards reveals, there are several new films in the works. Among them:
- X-Men 3
- Ghost Rider
- The Punisher 2
- Spider-Man 3
- Namor, the Sub-Mariner
Others in the concept stage include Iron Man, Luke Cage, and the Silver Surfer. Not bad, eh? I should point out that I liked a lot of these characters when I was a kid, and I think a few of them have promise. But please believe me when I stress a few. That's not enough. As the recent experience with Fantastic Four demonstrates, investors don't want mere hits. They want Spidey-sized box office receipts.
Now, to be fair, the recent malaise in Marvel's stock probably had more to do with its recent earnings report and lower year-over-year sales. Still, Fantastic Four had been in theaters three weeks when the report was issued, yet guidance remained largely unchanged.
The Foolish bottom line
Marvel must produce a continuous string of excellent and entertaining films to earn outstanding returns for shareholders. That means great writing, effects, and character development. All of that is possible, of course. It's just been hit-and-miss thus far. And if you think Marvel can't produce a stinker of a story, refer back to the comics. This is the company that brought Rocket Raccoon and the aptly named Omega the Unknown to the shelves, after all.
Investors seem to understand this risk intimately. Indeed, the stock trades for a meager 15 times forward earnings and 14 times free cash flow. Then there are the legions that have sold short more than 18% of the shares available to trade, betting that the price will fall. Don't dismiss these folks easily. They probably think Marvel's stock has met its match in that stock market archvillain, high expectations. I think they're right.
You're not done, True Believers! This is just one pulse-pounding part of a fantastically Foolish four-part Duel! Don't miss Dazzlin' W.D. Crotty's bullish perspective, Titanic Tim's rebuttal, and W.D.'s final word. When you're done, you're still not done. You canvoteand let us know who you think won this Duel.
Fool contributorTim Beyershas more comic books than regular books -- for now, at least. He didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out the contents of Tim's portfolio by checking his Fool profile, which ishere. The Motley Fool has an ironcladdisclosure policy.