Can Marvel's Stand Last?

Like millions of others over the Memorial Day weekend, I saw X-Men: The Last Stand, the final installment of a trilogy featuring Marvel Entertainment's (NYSE: MVL  ) unique brand of mutant superheroes.

The celluloid showdown between Magneto's Brotherhood of Evil Mutants and Professor X's X-Men proved to be a pulse-pounding thriller at the box office, taking in $130.2 million in proceeds as of this writing, according to film-industry tracker Box Office Mojo. Overseas, the film has taken in $84.7 million, for a worldwide total of $214.9 million.

It's even more impressive given that the first two films -- X-Men and X2: X-Men United -- grossed $703.8 million globally at the box office. That means X3's debut puts the entire franchise within $82 million of transforming Marvel's marvelous mutants into a billion-dollar blockbuster. No wonder News Corp. (NYSE: NWS  ) CEO Rupert Murdoch can't stop smiling. His company controls X-films distributor Twentieth Century Fox, which stands to take home the lion's share of the proceeds from X3.

A good script, wasted
Yet I remain unimpressed. The movie, though not bad by Hollywood standards, was hugely disappointing to me. I'm an admitted comics fan with dozens, if not hundreds, of X-Men issues stored away, including the seminal works by Chris Claremont and John Byrne that heavily influenced the first two films. The third, however, departs from the comic storyline in dramatic ways, and I don't think the changes work too well. (Seriously, Dr. Frasier Crane as the smart-but-tough blue-hued mutant Beast? Come on.)

But let's be fair: Mid-30's comic geeks aren't the primary audience for X3. And some of the performances were really good. Hugh Jackman is still well-cast as permanently angry mutant Wolverine. Sir Ian McKellen is terrific as the villainous Magneto. And, while little-used, Ben Foster's portrayal of the winged mutant Angel adds a nice touch. (Interestingly, it's the first film of the series in which all the original X-Men -- Professor X, Iceman, Beast, Cyclops, Angel, and Marvel Girl, a.k.a. Jean Grey -- all appear.)

Will you like Marvel when it's angry?
I credit the good casting to the creative control demanded by producer Avi Arad, who until yesterday was the chairman and CEO of Marvel Studios. Reuters reports that Arad has stepped down to start Avi Arad Productions, which Marvel says will produce films of its characters. Perhaps it's just me, but didn't Marvel just agree to become a movie studio so it wouldn't have to do draconian deals with film producers?

That's not to say Arad will be draconian in imposing terms on Marvel. But this is the guy who essentially rescued the company from bankruptcy with movie deals for the X-Men and Spider-Man. He's also been praised for his encyclopedic knowledge of the characters in the Marvel Universe. Isn't it fair to say that no one knows how to produce a Marvel film like he does? And if so, won't that demand a premium that Marvel hadn't expected to pay?

Maybe. Or maybe Arad will simply be siphoning dollars from Fox, Sony's (NYSE: SNE  ) Columbia, and other studios that have distributed films with Marvel characters. Whatever the details, Marvel has to make it worth Arad's while to continue working on its films. I, for one, think it will. He's just too passionate about the job.

Arad recently told Business 2.0 that he expects a Hulk sequel and Iron Man to be among the first films released by a newly independent Marvel studio. Either of those flicks could reach the box office as early as 2008. Neither of them, however, are covered by a $525 million financing agreement struck with Merrill Lynch (NYSE: MER  ) .

A look ahead
Still, it's probably fair to say that the financing for those films will come. Marvel films make too much moola to ignore. Consider: Even though analysts and moviegoers alike panned Hulk as a failure, it still took in $245 million in theaters worldwide, easily exceeding its budget of $137 million. And the success of X3 will undoubtedly provide leverage with creditors, as will the star power of 2007's upcoming flick Ghost Rider, which features Nicolas Cage as demonically possessed vigilante Johnny Blaze.

But here's the real question: Does Marvel's current stock price already reflect its potential movie success? Let's look back before we look forward, by examining how sales have historically affected the shares:

Year

Average

EV-to-Sales

In theaters?

Total box office take*

2005

3.79

Elektra, Fantastic Four

$386.6

2004

4.61

Spider-Man 2, The Punisher, Blade: Trinity

$967.4

2003

4.25

Daredevil, Hulk, X2

$832.1

2002

2.85

Spider-Man, Blade 2

$976.7

Source: Capital IQ, a division of Standard & Poor's
* Numbers in millions

Having established that Marvel's recent trading range runs from a low of 2.85 times sales to 4.61 times sales, it's time to take a stab at 2009 revenue. We'll have to make several assumptions to do so.

First, let's assume that Marvel will do at least as well as its average box office take between 2002 and last year -- $790.7 million. But not all of that would flow to Marvel. According to a Business 2.0 analysis conducted in conjunction with Jefferies & Co., Marvel can expect to earn 46% of the box office take on its films. That means its 2009 take might equal $363.7 million.

Next, we have to value Marvel's other businesses. Going again by the Business 2.0 and Jefferies analysis, we can assume that roughly 3% of the total take on Marvel movies since 2002, or $94.9 million, has flowed to the company as licensing fees. Subtracting that from Marvel's three-year total of $569.3 million in licensing revenue equals $474.4 million. Adding that to Marvel's $682.4 million in three-year total publishing and toy sales, then taking the average, comes to $385.6 million. Add that $385.6 million in non-movie revenue to the $363.7 million in anticipated Hollywood dollars, and you get $749.3 million in estimated 2009 sales. That's more than twice the company's reported revenue over the trailing 12 months.

Good news, right? Absolutely. Applying that $749.3 million to our historic multiples to enterprise value -- 2.85 on the low end, or 4.61 at the peak -- we can say that Marvel will likely be worth between $2.1 billion and $3.5 billion by the dawn of 2010. And since Marvel hasn't historically diluted stockholders, it's a reasonable bet that most if not all of these gains would find their way to common Fools.

The Foolish bottom line
I'm not much a fan of X3, but I'm very much a fan of Marvel's comics and its stock. I may, however, wait for a significant pullback in the share price to widen my margin of safety. The minimum return of a 40% market-cap gain -- that's $2.1 billion, divided by today's EV of $1.5 billion -- wouldn't earn me even 9% annually over four years. I prefer stocks capable of generating 15% or more.

Still, this is a good business, and its future projects include many compelling characters who could translate well to the big screen, especially wizard Dr. Strange, archer Hawkeye, and martial arts expert Shang-Chi. I also think a Hulk sequel, if done correctly, could play really well.

Prepare for a spine-tingling, pulse-pounding, sense-shattering four years, Fool. The big screen will never be the same. Excelsior!

Marvel is a Motley Fool Stock Advisor selection. A free all-access pass gets you a backstage look at all of the stocks that are helping David and Tom Gardner beat the S&P 500 by more than 30% each as of this writing. Try it free for 30 days.

Fool contributor Tim Beyers owns more than 2,000 comics but holds no shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.


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