You're Missing Out on Marvel

• Email
• Share
• Print

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:

• 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.