Marvel Enterprises
Pie in the Sky?

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By netman622
December 29, 2003

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There have been those who have referred to my bullish opinion and goals for Marvel as "pie in the sky". Everyone is entitled to their opinion (especially when it comes to investing their hard earned money!).

I have been a Marvel investor since the summer of 99. At that time I was a pretty green investor and Marvel was more of a gamble than an investment. In those early days, Marvel was purely an "event stock". One would buy Marvel before the major event (3-6 months to get a better price) and burn rubber to get out once the event excitement ran dry. I bought Marvel in the $1.50 - $2.50 range (and more as it rose) before X-men 1. The stock rose to the $7 range before dropping back to the earlier base price. I made a small profit because I did not understand this "event" philosophy.

When Marvel came out of bankruptcy, the management team had a dream of making Marvel a "licensing machine." They got out of the toy manufacturing business and let others make the toys (an expensive and cut throat enterprise). Marvel sat back and collected royalties off what others made on the toys. Marvel also did the same in the movie realm. Instead of taking the risk in making movies, they sold the rights to others (Sony, Fox, etc...)

This sounds like too simple of an idea to some. It was also a risky venture for Marvel in those days. Marvel was bleeding financially. They had MASSIVE debt and their income was very limited. The real question was: can they hold on long enough to get this licensing machine going? Most companies knew that Marvel was in trouble. Marvel was the most desperate girl on the dance floor (so to speak.) The deals they agreed to were for pittances. For example: Marvel got next to nothing for X-men 1. They were paid small up front money. When X-men was a huge hit, Marvel did not make anything extra. What X-men DID do was prove that a "comic based" movie could be successful. In the mean time Marvel did ink a few new deals. As some new deals were signed (Spiderman, Hulk, etc) Marvel got up front money that kept them afloat. Marvel cut costs and limped along. The success finally came as Spiderman 1 came. Even though Spiderman 1 was not a very good deal for Marvel it was wildly successful and produced obscene amounts of money for Marvel (obscene for a small company in desperate need of cash.) With this money Marvel paid down debt (to a more manageable level) and gained credibility (with Hollywood and Wall Street.) As Marvel continues to market it characters (in movies, toys, clothing or anything that can be licensed) the money rolls in. There is a tremendous synergy in all their products. Everything brings more visibility and this leads to interest (by consumers) and sales.

The past year has seen Marvel move from a struggling company that only went up because of a huge event, to a company that has powerful fundamentals that creates huge amounts of cash. Marvel is now a cash cow (and a debt free cash cow in June '04) that will grow as it makes more money. As a matter of fact it is an interesting hybrid. It will make money by the truckload as its royalty money comes in. It will also rise in price as "events" continue to happen. Marvel now has large and small events. Large events are the Movies (X-men, Spiderman, Hulk, etc--look at their list of upcoming movies.) Small events are the quarterly upgrades where management announces they are making MORE money than they previously thought. Without going into a long discussion, we know Wall Street severely punishes a company if they do not make their earnings goals. Conversely, they reward a company that can consistently meet or exceed earnings predictions.

All this said here is what happened and why Marvel will move up in the months ahead.

Big Event #1> X-men 1. Marvel rose from $1.50 to $7-8. A %400-500 gain. Following the event there were no fundamentals (or money) to support this price increase, therefore the stock fell.

Big Event #2> Spiderman 1. Marvel rose from the $2 range to the $8 range. Even though Spiderman was a huge success, the money would not roll in until the autumn following Spiderman. Come the fall, there would be DVD sales and toy sales. The summer after Spiderman saw the price fall to the $3-4 range. By fall when money began to come in management began to tell everyone about how the company was turning from red ink to black. As profits rose so did the price share ($5-6 range). The end of 2002 saw Marvel pay down a tremendous amount of debt at .50 on the dollar.

Big Event #3> Daredevil. Though Daredevil was not as big as X-men or Spiderman, the deal that was cut for Marvel was better. Marvel would make better $$ on box office and DVD sales. The rise in stock price for Daredevil would be amazing.

Big Event #4> Hulk. The deal for Hulk was not very good for Marvel. Marvel would make great $$ on toys and DVD sales (along with the raised credibility in future movie negotiations). Hulk would see some decline in price. Any huge event will see some back filling of share price.

But Marvel tempered the backward slide with their new weapon--"mini events". I have coined this term to describe the times that Marvel gives guidance for future earnings.

Mini Event#1> Summer earnings announcement in July/August helped stock price to go up %15-20.

Mini Event #2> Fall earnings announcement in Oct/Nov helped another %15-20.

Now we stand with a Marvel stock price of $30. This is not bad considering the "short" interest that holds the price down as well as the hatchet-reporting article in Barron's.

Looming Huge Event 2004> Spiderman 2 will slowly raise price as people want in before the movie in July.

Mini Event Jan/Feb '04> Increased guidance for income. Marvel Price rises %15-20. Result = MVL $35

Mini Event March/April '04> Increased guidance. Remember Marvel has been VERY, VERY conservative with past earnings announcements so they can do just this thing. Marvel price rises %15-20. MVL = $40

Mini/Big Event April '04> Release of Punisher movie. This will not be a huge Box Office, but it will continue to fill the Marvel money coffers. Marvel price rises 10-15%. MVL = $45

2 Mini Events in June> Increased earning announcement AND Marvel pays off ALL remaining debt. Marvel will be a debt free moneymaking machine. Marvel rises %10-15. MVL = $50

HUGE HULKLIKE EVENT> Spiderman 3 July 2 '04> Some of the increase that we will have seen in 'o4 will be due to Spiderman 2. One cannot expect that Marvel will triple or quadruple like past big events (though we can dream). This is why I believe that Marvel is a realistic bet to double from its current price, to $60.

One might say that Marvel is more mature in its financial growth. Therefore the fantastic increase in share will slow down. I agree. But I do not think the bloom is off this rose yet. Feel free to criticize and analyze. As with any investment, one needs to research and do their homework. I can sleep at night with these goals. They may seem "pie in the sky" to some. We'll see. In the mean time--I'll enjoy my pie!!!

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