Go ahead. Sell Marvel Entertainment
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
What's more, Marvel has no self-financed films planned for 2009 -- only a Wolverine solo shot made in concert with News Corp.'s
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
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
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:
- Here are 3 great reasons to love Marvel right now.
- These are strange days for the comic book king.
- Check out this Marvel team-up.