Buy Marvel, Sell Disney

Mickey, meet Spidey. Donald, meet Deadpool. Goofy, say hello to the Hulk. Please, try not to make him angry.

Too late. Rick Munarriz and I are dueling again, and this time we're pitting Marvel Entertainment (NYSE: MVL  ) against Walt Disney (NYSE: DIS  ) , a pair of Motley Fool Stock Advisor picks. After I'm done, I think you'll be ready to double down on Marvel and sell Disney.

That's right: I said sell.

Puny mouse! Marvel SMASH!
Think I'm crazy for writing that? I can understand. Disney is one of America's best known and most-beloved brands. My boys were watching "House of Mouse" on the Disney Channel when I was last upstairs for a coffee refill.

And Disney is a movie-making star. But so is Marvel. If it weren't, why would Viacom's (NYSE: VIA  ) Paramount Studios agree to reduce its distribution fee when booking a long-term, worldwide deal with Marvel Studios? Why did Sony (NYSE: SNE  ) agree to make Spider-Man 4, due in 2011? Why is Lions Gate (NYSE: LGF  ) marketing straight-to-DVD animated pictures starring Marvel characters such as Iron Man and Doctor Strange? Why does News Corp.'s (NYSE: NWS  ) 20th Century Fox studio continue to milk the X-Men movie franchise?

Here's why: X-Men Origins: Wolverine, a film made mostly for comic book fans and action geeks, has grossed $172 million domestically and $342 million worldwide, according to Box Office Mojo. Hugh Jackman's cranky mutant with the Cuisinart claws has been a global winner.

Better still: Wolverine cost roughly $150 million to make. How delighted do you think Rupert Murdoch is with these numbers? If your answer is "very," grab a lollipop from the bowl at the front of the class.

May I see your license please, Mr. Mouse?
Disney's characters are also a worldwide phenomenon, of course. My point is that the gulf between Marvel and Disney as licensing franchises, while huge in terms of dollars, shows signs of tightening. Iron Man has been spotted in Japan. Spidey is headed for Broadway. Captain America is being welcomed in Dubai. Even Bollywood wants more of Marvel.

In addition, the math is interesting. License Global magazine says Disney was last year's No. 1 consumer brand worldwide, responsible for $30 billion in sales. Marvel was fourth with $5.7 billion in sales, a shade behind the $6 billion generated by Time Warner's (NYSE: TWX  ) Warner Bros. and Looney Tunes characters.

Disney's licensing operation is 5.3 times bigger than Marvel's -- but its market cap is 16.6 times bigger. Please think about that for a minute.

Yes, Disney has a more pervasive business than Marvel. Yes, it produces a lot more licensing revenue than does Marvel. But is this gulf really fair? I can see 10 times, certainly -- Disney is well-established enough to deserve that sort of premium -- but more than 16 times? I don't buy it, especially when Marvel is growing faster and proving its model with each successive project.

To be fair, Disney looks like the cheaper stock in relative terms, with a 13.6 price-to-earnings ratio. Marvel, by contrast, trades for 13.9 times trailing earnings. Not much of a gulf, is it?

Why the House of Mouse isn't as cheap as you think
In fact, Marvel deserves the higher multiple. Not only is it growing faster -- Marvel's net income has risen more than 30% annually over the past three years, versus 9.6% for Disney over the same period -- but Marvel also earns dramatically more from every dollar of capital it deploys:

Return on Capital by Year

Disney*

Marvel

Trailing 12 months

7.7%

42.5%

2008

9.6%

40.3%

2007

9%

44%

2006

7.7%

19.9%

2005

6.1%

24.3%

Source: Capital IQ, a division of Standard & Poor's.
* Disney totals organized by fiscal year, which typically ends on Sept. 30.

Sometimes, the sequel is better than the original. Rocky II was better than Rocky. The Empire Strikes Back was better than Star Wars. Spider-Man 2 was better than Spider-Man. The Dark Knight was better than Batman Begins.

Among entertainment stocks, Marvel is the sequel, and it's better than Disney.

Get your clicks with related Foolishness:

Disney and Marvel are Stock Advisor selections. Disney is also an Inside Value pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers 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. Its disclosure policy wants a webshooter for its birthday.


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