Marvel Turns Iron Into Gold

Robert Downey Jr. may have missed out on Oscar gold for his fine performance in Tropic Thunder, but for Marvel Entertainment (NYSE: MVL  ) , his work in Iron Man has proved golden.

Reporting results earlier today, Marvel bested Wall Street's estimates for the sixth consecutive quarter by earning $0.80 per share on $224.3 million in fourth-quarter revenue. Analysts had expected $0.70 a share on $213.5 million in revenue.

For the year, Marvel booked $676.2 million in revenue and earned $2.61 per share, 39% and 54% increases, respectively. Both results eclipsed Wall Street's guesses.

A Golden Avenger brings gold and green
In Q4, Iron Man was, once again, the driver. Marvel's Film Production unit generated $135.5 million in fourth-quarter revenue, most of which was attributable to DVD sales of the film.

Interestingly, Marvel's studio partner, Viacom (NYSE: VIA  ) unit Paramount, hadn't yet issued it a check for its cut of Iron Man DVD sales as of the last day of the quarter. Accounts receivable skyrocketed as a result, up close to $111 million since September.

So, expect Marvel's cash coffers to be flush in the first quarter. Not that they aren't already:

Components of
Adj. Cash From Operations

2008*

2007*

2006*

2005*

Reported net income

$205,535

$139,823

$58,704

$102,819

Depreciation and amortization

$1,559

$5,970

$14,322

$4,534

Amortization of film inventory

$135,339

$0

$0

$0

Amortization of financing costs

$4,981

$4,980

$4,980

$1,660

Deferred revenue

($16,509)

($28,956)

$140,087

($6,093)

Film production costs

($53,135)

($251,045)

($15,055)

$0

Net borrowings from film facility

($74,209)

$255,926

$7,400

$25,800

Capital expenditures

($2,384)

($2,659)

($16,286)

($4,289)

Adj. Operating Cash Flow

$201,177

$124,039

$194,152

$124,431

Sources: Press releases, SEC filings.* Numbers in thousands.

Marvel ended 2008 with $138 million in cash and short-term investments. And that's after paying off more than $180 million in film debt and spending $10.5 million to repurchase shares.

Whither Wolverine?
Those are undeniably impressive numbers. Yet bears will tell you that Marvel's 2009 story lacks punch. "Pipeline for 2009 is weak. Strong competition in genre in 2009 from Watchmen, Terminator, and Star Trek. Look for recovery in 2010," wrote CAPS investor abgreenberg recently.

True. In particular, I like the previews for Star Trek and Watchmen as much as I like the previews for X-Men Origins: Wolverine. Plus, Wolverine is a licensed property -- all the film rights to X-Men characters were sold to News Corp.'s (NYSE: NWS  ) 20th Century Fox years ago, around the time that Sony (NYSE: SNE  ) purchased the celluloid rights to Spider-Man.

Marvel's overall licensing business, meanwhile, is expected to produce just $180 to $200 million in 2009 revenue, well below last year's $292.8 million. Wolverine, declawed. Unless, that is, management is being exceptionally conservative with its estimates, which it usually is.

So, I can see the rationale for selling -- or waiting to buy -- if you're a trader. But if you're not, if you're building a portfolio to generate wealth over the very long-term, why wouldn't you buy Marvel now?

Psssst, buddy! Want to buy a studio, cheap?
Put it this way. Film Production alone produced $102.7 million in operating income last year. Taxing that at 40% and then dividing by 78.9 million shares outstanding results in $0.78 per share.

What's that worth in market value? Assigning multiples can be a tricky business. Here, because of economic uncertainty and the 2009 lag, I choose 10. It's also close to the trailing P/E of the S&P 500 SPDR (AMEX: SPY  ) .

The rest of the math is easy. Assuming Marvel Studios is worth $7.80 per share -- $0.78 times 10 -- then the rest of the company (i.e., licensing, publishing, etc.) was worth just $16.12 a share as of yesterday's close, or less than 9 times the $1.83 in per-share income those units generated last year.

Only in a panicked market like ours would that price be considered fair. Actually, not even then; shares of Marvel are up more than 15% as I write. Yet, even after the run-up, the stock still trades for roughly 11 times trailing earnings. Cheap, right?

Skeptics will argue that's fair given that Disney (NYSE: DIS  ) trades for less and is a much bigger studio. What they're missing is growth. Marvel is on track to produce more of it thanks to films and a renewed licensing deal with Hasbro (NYSE: HAS  ) .

Marvel also generates the sort of stratospheric returns on invested capital common to a high-growth software company, not a movie studio:

Return On Invested Capital*

2008

2007

2006

2005

Earnings before interest and tax

$367.97

$273.03

$110.16

$181.17

NOPAT (37.5% tax rate)

$229.98

$170.64

$68.85

$113.23

Avg. Invested Capital

$540.16

$387.86

$345.75

$466.45

ROIC

42.6%

44%

19.9%

24.3%

Source: Capital IQ, Marvel press release.* Numbers in millions.

This is a studio that turns iron into gold. That has to be worth more than a market-average price.

Face front, True Believer! More Marvel Foolishness awaits:

Disney, Hasbro, and Marvel are Stock Advisor selections. Disney is also 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 is also an analyst for Motley Fool Rule Breakers. He had stock and options positions in Marvel at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool.

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


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