2006 in Review: Marvel

Your friendly neighborhood stock, man
Comic books are great. My fondness for them, born during my childhood as a collector, derives from their simplicity: Heroes win, villains lose.

If only Marvel Entertainment's (NYSE:MVL) business were as simple. No longer just a comic book publisher, this mighty Motley Fool Stock Advisor pick hopes to become a full-fledged Hollywood studio. It's a pulse-pounding cliffhanger that has investors on edge.

And they should be -- Marvel's shares have leapt by 70% so far this year. Not even the Hulk, who returns to the big screen in 2008, could be expected to clear a chasm that wide over so short a period (though the steroid-like impact of more than $100 million in stock buybacks sure did help).

That's why mutants did much of the work. Marvel's X-Men: The Last Stand stormed theaters over the Memorial Day weekend and held firm, booking $234 million in domestic box office receipts.

More budding blockbusters are due next year. But the hopes of Marvel's boardroom heroes depend on Robert Downey Jr., who in 2008 will don the red-and-gold armor in Iron Man, Marvel's first independently produced film. Till then, toying around with Hasbro (NYSE:HAS), which could result in as much as $200 million in revenue, is as good as it gets.

Just look at the numbers. With no recent flicks to power up licensing, Marvel's first-quarter revenue declined by 14% and net profit fell by 37%. The balance sheet, meanwhile, was transformed: Cash on hand dwindled to just $22 million. Investors hardly noticed as the stock remained near $20.

July brought management mayhem, and August brought another solid if unspectacular quarter. Give the daredevils among Marvel's management team the credit; they borrowed millions to buy back shares as the stock remained steady at $20.

By November, investors were convinced a heroic ending was on the way. Marvel didn't disappoint. Both sales and earnings easily topped estimates and net margins remained solidly in the double digits. Meanwhile, executives projected that per-share earnings would grow by anywhere from 125% to 150% during fiscal 2007. Excelsior!

Will Q4, which ends this month, be just as good? Not likely. Current guidance calls for between $0.08 and $0.11 in per-stub earnings on $63 to $73 million in sales. Last year, Marvel's Spidey-sized fourth-quarter produced $0.26 in per-share net profit and $117 million in revenue.

Embracing the X-factor
Yet investors still believe Marvel will rescue their portfolios:

Why so much enthusiasm? Blame Fool co-founder David Gardner. He says Marvel is still a stock market hero:

"...Marvel is at heart an intellectual property company, with ownership of some of the most popular superheroes of all time...I continue to have some questions about management, as they have overseen the launch of many BAD movies in recent years and they couldn't seem to be more ecstatic about them (Daredevil, Punisher, etc.). Fortunately, the quality of Spiderman and the X-Men flicks, backed up a bit by average but marketable enterprises like The Fantastic Four, means that Marvel has more than enough long-term staying power to continue to print money. I like this as a passive buy."

The Foolish bottom line
I have my doubts about studio stocks like Marvel, DreamWorks (NYSE:DWA), and Lion's Gate (NYSE:LGF). A complicated movie-financing scheme doesn't help assuage my fears. Neither does knowing that the value of Marvel's next act could be as murky as the Swamp Thing's rancid domicile. Yet it's hard to argue with David. Not only does he hold sway over my paycheck, but he's also generated huge returns for lazy investors who followed his buy-to-hold counsel in Stock Advisor.

Will Marvel retreat from the precipice in 2007? That's a question for another day. Be sure to tune in for our 2007 Marvel preview.

And in the meantime, if you're looking for superior stock ideas, consider Stock Advisor. Thanks to massive winners like Marvel, David and brother Tom are walloping the market by nearly 40%. Clicking here will get you 30 days of free access to the service right now. Happy holidays.

Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.

Fool contributor Tim Beyers, ranked 1,013 out of 17,523 in Motley Fool CAPS, owned more than 2,000 comics but no stock in any of the companies mentioned in this story at the time of publication. Get the skinny on all of Tim's stock holdings by checking his Fool profile. DreamWorks is also a Stock Advisor selection. The Motley Fool's disclosure policy is super-powered.