You're Missing Out on Marvel

Go ahead. Sell Marvel Entertainment (NYSE: MVL  ) . I dare you.

Shares of the comic book king were down as much as 8% this morning after its third-quarter report showed huge gains in revenue (up 47%) and per-share earnings (up 42%). Marvel also raised its full-year guidance from $1.55 - $1.75 per share to $2.45 to $2.65 a share.

None of that mattered. Investors chose instead to focus on 2009 guidance, which calls for just $1.00 - $1.35 in per share net income. Dumb. Next year will be light because Iron Man DVD sales are brisk. Brisk enough that payments from Viacom's (NYSE: VIA  ) Paramount Studios, originally scheduled for 2009, will now be made this year.

What's more, Marvel has no self-financed films planned for 2009 -- only a Wolverine solo shot made in concert with News Corp.'s (NYSE: NWS  ) Fox. Licensing revenue does best when there's a full film slate to provide a tailwind.

Economic headwinds also come into play. Vice Chairman Peter Cuneo called this year's panic-cum-opportunity "unprecedented" and told analysts that "it's very prudent for us to be cautious with our projections." The low-end of Marvel's 2009 guidance calls for a 10%-15% recessionary effect on every area of its business.

All hail the cash flow king
But what a business it is. Cash just keeps flowing:

Components of

Adj. Cash From Operations

TTM*

2007*

2006*

2005*

Reported net income

$170,154

$139,823

$58,704

$102,819

Depreciation and amortization

$2,465

$5,970

$14,322

$4,534

Amortization of film inventory

$65,599

$0

$0

$0

Amortization of financing costs

$4,981

$4,980

$4,980

$1,660

Deferred revenue

($19,105)

($28,956)

$140,087

($6,093)

Film production costs

($113,350)

($251,045)

($15,055)

$0

Borrowings from film facility

$123,448

$255,926

$7,400

$25,800

Capital expenditures

($1,218)

($2,659)

($16,286)

($4,289)

Adj. Operating Cash Flow

$233,334

$124,039

$194,152

$124,431

Sources: Press releases, SEC filings. *Numbers in thousands. TTM = trailing 12 month

And it's flowing onto the balance sheet, where you'll find more than $145 million in cash and short-term investments versus $182 million in net film debt. That's down $106 million from what the company owed in December. $106 million in nine months. Few firms short of Microsoft (Nasdaq: MSFT  ) can boast as much relative cash-generating horsepower.

The mighty checkbook
Which explains Marvel's planned capital outlays; they aren't slowing a bit. Chief Financial Officer Ken West told analysts to expect $175 million in cash spending on Marvel's next four films -- Iron Man 2, Thor, Captain America, and The Avengers -- in 2009. He also said that Marvel should close next year with $100 million in cash and equivalents.

Do today's sellers realize how remarkable that is? Barring debt repayments, Marvel will end 2008 with between $200 and $215 million in cash and equivalents -- enough to write a check in January for all of next year's film spending.

And yet Marvel shouldn't need anywhere near $175 million. Not unless management plans to pre-pay its production commitment (33% of total budget) for both Iron Man 2 and Thor and most of its up-front costs for Captain America and The Avengers.

That's exactly what I'm expecting: huge up-front spending in 2009 in order to reap a windfall of profits and cash flow from any successes in 2010 and 2011.

Management muscle
Call it Marvel's financial superpower, as witnessed by huge returns on invested capital:

Return On Invested Capital*

TTM

2007

2006

2005

Earnings before interest and tax

$313.12

$273.03

$110.16

$181.17

NOPAT (37.5% tax rate)

$195.70

$170.64

$68.85

$113.23

Avg. Invested Capital

$453.68

$387.86

$345.75

$466.45

ROIC

43.1%

44.0%

19.9%

24.3%

Source: Capital IQ, filings. *Numbers in millions. TTM = trailing 12 month

Marvel bests every one of its peers when it comes to ROIC, which improved six percentage points from Q2 to Q3. Neither Disney (NYSE: DIS  ) , nor DreamWorks (NYSE: DWA  ) , nor Time Warner (NYSE: TWX  ) , producer of the summer blockbuster The Dark Knight, get close. Only DreamWorks and Disney get into the double-digits.

So go ahead, investors. Sell Marvel, I dare you. All you have to lose are years of multibagger returns.

Face front, True Believer! More Marvel Foolishness awaits:

Disney, DreamWorks, and Marvel are Stock Advisor selections. Microsoft is an Inside Value pick. Try either of these market-beating services free for 30 days. There's no obligation to subscribe.

Fool contributor Tim Beyers had positions in Marvel shares and LEAP options at the time of publication. He also hunts for the best of tech as a member of the Motley Fool Rule Breakers team. Here's how to try this market-beating service free for 30 days. Get access to all of Tim's Foolish writings here.

Don't make The Motley Fool disclosure policy angry. You wouldn't like it when it's angry.


Read/Post Comments (3) | Recommend This Article (21)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 04, 2008, at 7:08 PM, ColoCdn wrote:

    Right on Tim... I added Marvel to my portfolio on the dip Monday in anticipation of today's results - and then watched through the day as the smart money poured in, clawing back that 8% setback and ultimately driving Marvel's price up by 1.85% at the close. That says it all for me, and I'm long MVL!

    -Colocdn

  • Report this Comment On November 05, 2008, at 8:31 PM, 20MalbecRoble05 wrote:

    How dependent will MVL be on the successes of their movie releases? What happens if one or more of their movies bombs? Would they recover the up-front costs of production from the DVD releases and licensing?

  • Report this Comment On November 12, 2008, at 1:42 PM, mhoemann wrote:

    20Malbec: Marvel's primary business model is Licensing their character's likenesses, which is a very strong revenue stream. They're involved in more than just movies, which gives them a strong base as a company.

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