Marvel Is So Money

If you're at all like me, you're among the many who propelled Iron Man to a $100 million-plus opening at this weekend's domestic box office. What a boon for Marvel Entertainment (NYSE: MVL  ) , eh?

Sure. Thing is, Marvel doesn't exactly need a boost:

Components of Adjusted
 Cash From Operations

TTM*

2007*

2006*

2005*

Reported net income

$138,212

$139,823

$58,704

$102,819

Depreciation and amortization

$4,505

$5,970

$14,322

$4,534

Amortization of financing costs

$4,980

$4,980

$4,980

$1,660

Deferred revenue

$42,875

($28,956)

$140,087

($6,093)

Film production costs

($256,996)

($251,045)

($15,055)

$0

Borrowings from film facility

$287,900

$255,926

$7,400

$25,800

Capital expenditures

($1,545)

($2,659)

($16,286)

($4,289)

Adj. Operating Cash Flow

$219,931

$124,039

$194,152

$124,431

Sources: Press releases, SEC filings.
*Dollar figures in thousands.

Look at that cash ... flow. Marvel earned so much of it in the first quarter that, since December, cash and short-term investments rose from $51.2 million to $127.4 million.

And the other numbers? Operating profit from its core licensing business fell to $85.4 million from $98.8 million in last year's Q1. But even that's inflated; $19 million was derived from the termination of two interactive licensing agreements.

Exclude that and the division's operating margin fell to 82%, CFO Ken West told analysts, resulting in $66.4 million in licensing profit. But that 30% decline is better than it sounds. Last year, Marvel benefited from $57 million in profit from its Spider-Man joint venture with Sony (NYSE: SNE  ) . This year, with no Spider-Man sequel in theaters, profit from the JV dropped to $30 million.

Revenue and profit also fell. Sales were down 26% to $112.6 million. Net income fell 3% to $45.2 million. But per-share earnings rose 7%, thanks to stock buybacks that shrunk its average diluted share count by nearly 8 million.

Call it a testament to management's ability to deploy resources effectively. Even this quarter, with less revenue and higher debt, return on invested capital remained above historic levels:  

TTM*

2007*

2006*

2005*

Earnings before interest and tax

$259.50

$273.03

$110.16

$181.17

NOPAT (37.5% tax rate)

$162.19

$170.64

$68.85

$113.23

Avg. invested capital

$431.51

$387.86

$345.75

$466.45

Return on Invested Capital

37.6%

44.0%

19.9%

24.3%

Sources: Capital IQ, filings.
*Dollar figures in millions.

Lights ... camera ... profit!
Here's the best part: Because self-produced films have yet to produce a penny of operating profit, these returns are very likely lightweight.

And that's even when you factor in higher-than-expected expenses, which Marvel might face. Studio chief David Maisel told analysts that production costs might go as high as $165 million for its films. Prints and advertising may average $120 million.

Applying those higher expenses to Iron Man, and using the model executives created in a 2006 presentation, would still result in no less than $116 million in operating profit -- assuming ol' Shellhead earns at least $250 million at the domestic box office.

If I'm right, and if Marvel's timing model holds, then Iron Man alone could bring in at worst $62 million in 2009 operating profit. (And I do mean "alone." Toys and merchandising profit are figured separately in Marvel's model.)

Hold the popcorn
Naturally, with numbers like that, investors are hoping to see Marvel pump out as many films as it can. But we'll have to wait. Thanks to delays forced by the writers' strike, Marvel Studios will skip theaters in 2009, except for a planned profile of X-Man Wolverine via its licensing deal with News Corp.'s (NYSE: NWS  ) Fox.

Nevertheless, I like the move. Marvel has established the first weekend of summer as its "turf" for introducing new superhero characters. Why rush to cobble together a less-than-excellent film for next year's summer season when, looking at the company's financials, it doesn't need to? Conservative management simply makes more sense.

There's also history to consider. DreamWorks (NYSE: DWA  ) skipped 1999 and produced just one film a year from 2001 to 2003 (which included Shrek). Disney's (NYSE: DIS  ) Pixar studio didn't release a single film in 1996 or 1997. Pixar was also absent in 2000, 2002, and 2005. Quality matters enough to these producers that they don't rush to release.

Let Marvel follow their lead. As a shareholder, quality matters to me, too.

For more Marvel:

Marvel, Disney, and DreamWorks are all Stock Advisor selections. Try this market-beating service free for 30 days. There's no obligation to subscribe.

Fool.com and Rule Breakers contributor Tim Beyers had positions in Marvel shares and LEAP options at the time of publication. The Motley Fool has a market-beating disclosure policy.


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