When an investment thesis changes, as may happen when a company redefines itself, the Foolish investor needs to sit back, take stock, and determine whether the reason for holding or buying that company is still valid. Case in point: Marvel Entertainment (NYSE: MVL). Since it recently released earnings, now is as good a time as any to look at this changing company.
Like its superheroes, Marvel has risen from near-destruction to continue fighting the good fight. Escaping from bankruptcy, the company has licensed several hit movies and toys based on its characters, while still publishing the comic books that feature those characters. On May 4, the company reported better-than-expected earnings of $17.5 million or $0.19 per share, well ahead of the consensus expectation of $0.12 per share. Note, though, that a little more than $0.02 was attributable to a repurchase of 18.4 million shares. Revenue was also ahead of the expected $77.45 million, coming in at $90 million.
These numbers were down on a year-over-year basis. This isn't surprising, considering that much of the licensing revenue is highly dependent on movie releases. In 2005's first quarter, for instance, a lot of Spider-Man 2 licensing revenue came in. That wasn't present last quarter and contributed to a 44% drop in licensing revenue year over year. Expect this kind of bumpy ride going forward, too, because Marvel will continue to get licensing revenue from movies that others make, such as X-Men 3, due out this month, and Spider-Man 3, scheduled for next year.
Now, for the redesign. As holders of the company know, Marvel feels that it's giving up too much revenue and profit to its licensed film partners, such as Twentieth Century Fox, a division of News Corp. (NYSE: NWS), and Columbia Pictures, a division of Sony (NYSE: SNE). For instance, from the very successful Men in Black movie, it's reported that Marvel made only $1 million. Now, in addition to licensing, it wants a bigger take of the pie and plans on making its own movies.
From a production viewpoint, this makes sense. The company is heavily involved in the filming and production of its movies, even getting into the finer points of its superheroes' characteristics. Now, the company will have complete control over all aspects of the film, from script to director to actors to character movements on screen. But that kind of change brings with it a degree of risk. After all, Marvel has been a publisher that licensed intellectual property -- not a movie studio. Starting with its first movie, though, expected sometime in 2007, company and investors alike must worry whether it will prove as wildly successful as the likes of Spider-Man or The Fantastic Four. Now it has the downside risk of making movies, as well as keeping all the upside.
The bottom line is that this company is changing dramatically. It's not the comic book licensor it was a short time ago. Investors, both old and new, should reevaluate their holdings and determine whether what they want is to own shares of a movie studio that also publishes comic books and licenses toys.
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Fool contributor Jim Mueller used to read comic books, but now he reads annual reports. He doesn't own shares in any company mentioned. The Fool has a strict disclosure policy.
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