In the competitive spirit of college basketball's annual championship tournament, The Motley Fool brings you Stock Madness 2007! Our writers are making head-to-head arguments for their chosen stocks (but not necessarily investment recommendations -- this is, after all, a game), and you'll pick the winners with your article recommendations and Motley Fool CAPS ratings. Who will win the right to cut down the net? Let's tip things off and find out!
Among other things, my checkered resume includes a stint as a high school girls' basketball coach. From those days, and in my many basketball-playing and -watching days since, I've learned two things about the game that relate directly to this contest:
1. Matchups matter.
2. Momentum matters more.
On that second point, let me introduce you to the Virginia Commonwealth Rams. Last night, this team upset Duke 79-77, when a dramatic last-second shot by sophomore guard Eric Maynor touched nothing but net.
Maynor wasn't lucky; he was good. And both he and his teammates were on a roll. For example, the shorter VCU team torched Duke from behind the three-point arc, knocking down nine of 16 threes, versus just three of 11 for the Blue Devils.
That was the difference in the game. Now, Duke, losers of four straight, head home to Durham, N.C. And VCU, winners of six straight, including a conference tournament victory over last year's Cinderella, George Mason, face the Pitt Panthers in the second round.
Another Cinderella story
Which brings me to today's Stock Madness matchup. At first glance, you'd think there's little reason for you to vote for Stock Advisor selection Marvel Entertainment (NYSE: MVL ) over Motley Fool Hidden Gems pick Middleby (Nasdaq: MIDD ) . Oven maker Middleby, like Duke, is a powerhouse on paper.
Still, I'd rather coach Marvel. What other team boasts a lineup that includes a Norse god (Thor), an ironclad avenger (Iron Man), and a wisecracking, web-spinning wall crawler (Spider-Man)? Just imagine what the bench looks like.
But I digress. Marvel is my choice because it has momentum and, with catalysts, the ability to rain threes on Middleby, as VCU did to Duke.
Let's start with momentum. Marvel's full-year earnings report beat estimates on both the top and bottom lines. And while management revised the low end of guidance downward -- not usually a good sign -- that revision had nothing to do with the fundamentals of the business. To the contrary, by doing well, Marvel has attracted a higher tax rate.
And the numbers really are impressive. Marvel trades for 18.9 times its $1.44 per share in estimated 2007 normalized earnings. If analysts are correct -- and most often, they've been wrong to the low side -- that would make for a 115% improvement. Talk about momentum.
That ghost sure can shoot the three
But it's the catalysts that should give Marvel the win here. Why? Ghost Rider. Though it isn't a self-produced, self-financed Marvel film, it has put up big numbers. Let's review.
Ghost Rider debuted in theaters on Feb. 16 and pulled in $52 million during its first four days at the box office. Today, the film has grossed $180.8 million worldwide, according to film tracker Box Office Mojo.
Here's why this matters. Last August, Marvel gave a presentation of what we as investors might expect from its films. What it showed was that while Marvel might lose money on a film that took in only $100 million at the domestic box office, it would win big on any flick that took in $150 million or more.
If that sounds bad -- Ghost Rider, after all, is only at $105 million domestically -- you haven't read the fine print. Marvel's projections assume a $130 million production budget and roughly $75 million in prints and advertising costs.
We don't know what Marvel and Sony (NYSE: SNE ) spent on P&A for Ghost Rider. But we do know that the film cost only $110 million to produce. Do the math. As a self-financed production, Ghost Rider might have been well on its way to $20 million in profit. Mixing in Marvel's guaranteed cut -- equal to 5% of the domestic box office -- we get at least another $21 million in operating income. That's $41 million -- for a minor Marvel character.
My point here is that Marvel has found a formula that is leading to excess profits for Sony, News Corp.'s (NYSE: NWS ) 20th Century Fox, Lions Gate (NYSE: LGF ) , and other studios today. Come 2008, when Iron Man and The Incredible Hulk reach theaters, those profits will begin flow to Marvel. That will make for a sharp-shooting offense and, as with VCU's triumph over Duke, it should be enough to earn a win here.
Do you agree? If so, follow this link and rank Marvel "outperform" in Motley Fool CAPS. Later this week, our editors will tally your votes to determine which stocks will advance one step closer to the title.
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Fool contributor Tim Beyers, who is ranked 1,106 out of more than 24,300 in our Motley Fool CAPS investor-intelligence database, still owns more than 2,000 comics but didn't own shares in any of the stocks mentioned in this article at the time of publication. All of his portfolio holdings can be found at Tim's Fool profile. His thoughts on Foolishness and investing may be found in his blog. The Motley Fool's disclosure policy is a hero to your portfolio.