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Marvel Enterprises
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Are the Shares at Fair Value?

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By dduct
May 13, 2003

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Its market cap is over US$1 billion and the share price is close to 3 times sales.

The issue is not sales. It is profits. As the Fool pointed out very well, this is an extremely profitable company. Review this commentary by David Gardner.

Also go to marvel.com and view the slide presentation at the lower right corner on the home page. It does an excellent job of explaining the years of revenue flow a movie produces.

So, what about sales? If you only focus on movies (not a good idea), Marvel is going from three in 2003 to five movies next year. That is a 66% increase in the number of movies. Better yet, two of those movies are equity participation movies (which you will learn from the slide show are the best deals Marvel can get).

As Marvel has one hit after another, their ability to get better deals is enhanced. For example, the Hulk movie has all movie related revenue capped (i.e., toys, books, etc., are still Marvel's uncapped bastion). The movie revenue cap only applies to the current movie. You will not see Marvel writing any more of those contracts now that they have a proven money maker. So, when you view 2003 sales, realize revenue is restricted because, in the past, Marvel did not have a lot of contract leverage. The future will be different because of today's successes.

Games, toys, books, comics, and the like are all areas where Marvel generates money -- excellent money. Their future is bright and the strong increase in the number of movies (and the character exposure they bring) will certainly boost revenue in these areas. Marvel's large debt, and its high interest rate, is something the company will start to repay in June of 2004. Paying down the debt will improve profitability. This improvement in margin will help cushion the loss of favorable tax loss carry-forwards from the company's unprofitable past.

There are recent posts that cover the free cash flow, movie contracts, etc. There is a lot to like about Marvel.

So, what is the stock worth? The high end of the company's earnings guideline is $1.07 for 2003. Since the company has been beating earnings estimates, this is probably well within the company's reach. If Pixar can sell at 38 times earnings, why not Marvel? $40.66 is a decent target. When will it get there? That is hard to say but a year from now might be a reasonable target.

There has been some flack over my Pixar comparison a week ago. Since I have owned Pixar most of the time since their IPO, those who thought I was unaware of their Disney deal expiring were wrong. Pixar has been very successful and they have a great team producing a great product. They also have risk because they are investing their income in new movie product. One flop would hurt them. When Marvel has 5 movies in a year, and the financial burden is carried mostly by the movie studio, one flop is not going to hurt them as much.

As time passes too, the tables will turn in Marvel's favor just has they have for Pixar. Contracts for characters will expire. At that point, Marvel might want to take over a movie franchise and take the entire risk. Movies like Spider-Man are rare, but when you have a vehicle taking in over $800 million internationally, you have to look at Marvel's future and ask, "Is this sustainable?" If you think it is, and I think it is, then the future is very bright.

Pixar has done well in licensing too. Books, toys, and games are part of their revenue stream as well. It is my opinion, though, that Marvel has a better character base for these venues. People may scoff at the fact the Hulk has the movie revenue capped, but a blow-out performance this summer has the potential to create blow-out demand in areas where there is no cap. Profits are what this is all about and outlook for this year is excellent -- as is the future.

Do your DD. You may decide to pass. That is what [makes] markets fun...

dduct


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