With great power comes great responsibility. That's the Spider-Man mantra. It may also be the mantra of its owner, Marvel Enterprises (NYSE: MVL ) . After all, the comic book company has certainly made the most of the golden opportunity that has presented itself in recent years. With the uncanny superhero power of turning its popular printed-page characters into dynamic, money-spewing entities, Marvel's might has certainly served its shareholders right.
The stock has risen by 500% since it was recommended to Motley Fool Stock Advisor subscribers three summers ago. Marvel was also the subject of the very first special report distributed to members of our Rule Breakers newsletter service last year. It's safe to say that this company is on the minds, if not portfolios, of many Fools. So I know my recent skepticism may not be appreciated in some Foolish circles. That's fine. I have been wrong before. I will be wrong again. But am I wrong now?
Chilling like a villain
Marvel's transformation has been amazing. Several years ago, Marvel was a sleepy company with a pile of debt and preferred-dividend liabilities. After the Hollywood success of its character-licensed Spider-Man, X-Men, and Blade films, Marvel put its greenery to good use and went in for a massive makeover. It eradicated most of its liabilities, with enough money left over to fortify its balance sheet's liquidity and buy back some shares.
Yes, life is good when you are in demand. Hot movies mean hot toy sales and greater bargaining power when it comes to negotiating new movie and merchandising deals. Even though earnings dipped last year, that was actually the result of the company's suddenly beefy income tax bill. A better gauge was the company's improvement in operating profits. They grew by 34% last year.
There is even a bright side to what appears to be the company's rather lackluster guidance for 2005. The company is looking to earn between $1.07 and $1.12 per share this year, flat with its $1.10 showing in 2004. Marvel expects sales to come in at no more than $390 million this year. Yes, that's 24% lower than the $513 million that the company rang up last year. However, put that dwindling top line and flat bottom line together, and it adds up to improving profit margins. Nice.
That's why I'm not worried about Marvel based on its lack of earnings growth since 2003. I can live with that. This is a hit-driven business. The inclines will be more rocky than smooth. No problem there. So why am I concerned? Well, it's all about the vehicle, baby.
Not bad, just drawn that way
We are now just two weeks away from the theatrical debut of Fantastic Four. A lot seems to be riding on the success of this film. For shareholders' sake, I certainly hope that's not the case. This one could be trouble. Just call me Doctor Doom.
Back in January, Box Office Mojo polled its site visitors, asking: "What is your most anticipated movie of 2005?" Revenge of the Sith took first honors. Batman Begins came in a respectable third. Where did our fabulous foursome clock in? Ninth. It was lapped by Sin City, the star-studded epic that ultimately took in a rather lame $74 million domestically at the box office.
The War of the Worlds, which opens next week, came in fourth. Can you believe Marvel's luck? We're looking at a summer of record-low theater visits, and F4 has the misfortune of opening behind the most anticipated action flicks of the summer.
And even those at the top of the list haven't fared all that well. Batman's latest foray into celluloid hasn't exactly been a blockbuster. Time Warner's (NYSE: TWX ) movie may have the critics raving, but it sold just $47 million in tickets during its opening weekend (or a still-unimpressive $71 million if you tack on its Wednesday debut and the Thursday that followed).
It will still become the 20th comic book adaptation to top the $100 million mark stateside in ticket sales. The problem is that it will join Spider-Man 2 as the only ones to reach that mark over the past two years. The genre just isn't as vibrant as it used to be.
That is what should be worrisome to Marvel investors, especially given its flat profit growth. How will Marvel grow earnings if the public just isn't interested in its comic book heroes anymore? Did you think the wave of recent superhero duds like Catwoman or Marvel's Elektra was coincidental? Are you adamant that as long as the content material is solid, patrons will continue to flock to the moviehouse?
If that's the case, forget about Stan Lee for a moment. Where would Marvel be without Spider-Man director Sam Raimi? That's a scary thought: Do you really want to buy into Marvel based on the ability of third-party directors to craft classic popcorn munchers?Oh, wait. Marvel cracked open a $525 million non-recourse credit line so it could start financing its own movies. Talk about a case of bad timing. Time Warner has a Superman movie on the way, so we may very well have a glut of big-budget comic book movies out there fighting for scraps. And Marvel is now going to finance some of its own releases?
Reality pitches a no-hitter
Marvel feeds off the blockbuster. It's what sets everything else in motion. If the movie isn't a hit, a teen isn't likely to fork over $50 for the Activision (Nasdaq: ATVI ) video game. A kid isn't going to want the character's electric toothbrush. A parent isn't going to rush out to Best Buy (NYSE: BBY ) to scoop up the DVD when it comes out a few months later.
Marvel has done an amazing job of widening its offerings. It's even hitting the animated market next year, though that's another niche that suddenly finds itself a bit crowded as Pixar (Nasdaq: PIXR ) and DreamWorks Animation (NYSE: DWA ) ramp up their production schedules. Marvel has done so many things right in the process of monetizing its library of more than 5,000 characters that it's hard to fault the company itself. The problem, however, lies not with the supply but with the demand.
Earlier this year, I interviewed Netflix (Nasdaq: NFLX ) CEO Reed Hastings. When asked how he felt about superhero films, he opined that the genre had run its course for now. This is a guy who makes a living out of anticipating the renting whims of movie buffs. His opinion is especially weighty these days because theater operators are blaming a dreadful year at the box office on the perceived convenience of waiting to watch the movie on DVD at home.
So how confident can one be that Fantastic Four will save the summer for Marvel? Have you seen the trailers? I haven't found them to be particularly inspiring. It's the wrong film at the wrong time. What's the draw? Jessica Alba? Even Halle Berry and Jennifer Garner in skimpy outfits couldn't get fannies in the seats for their superhero flicks. Action? Between Star Wars, Batman Begins, and H.G. Wells, the public may be a little worn out on that front come July.
Yes, Marvel has Spider-Man 3 coming out in 2007, and X-Men is another great Marvel property. Then again, did anyone catch Blade Trinity? The third movie in the Blade series made a paltry $52 million stateside. That was far less than the first two installments of the trilogy.
I will still root for Marvel -- even if it hurts. That's the kind of company that we have come to fancy as part of our Rule Breakers ultimate growth investing philosophy. The thing is, though, we like to catch them just as they are starting to bust out of their shell. I'm thinking Marvel circa 2002. You know, that exciting moment when a company realizes that it truly has great power.
Great power? Great responsibility? Now that's a great investing opportunity.
- Yes, Time Warner is back in comic-book-milking mode.
- Call me your nemesis in our lively Marvel discussion board.
- Or make your own predictions about the best summer flicks on our Great Movies board.
Marvel, Time Warner, Activision, Best Buy, and Netflix have all been singled out in ourMotley Fool Stock Advisor newsletter service.
Longtime Fool contributor Rick Munarriz hopes that his secret power isn't a knack for deflating hope. He does own shares in Netflix and Pixar.The Fool has a disclosure policy. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.