Editor's note: The prior version of this article reported that Avi Arad made $625 million last year, when in fact the correct figure is $625,000. We regret and apologize for the error.
Marvel Enterprises (NYSE:MVL) has had a huge run since David Gardner first recommended it back in mid-2002 in the Motley Fool Stock Advisor newsletter. I tend to focus on value -- heck, I'm so cheap that I didn't even own table salt until a friend gave me some. Thus, impressive short-term market returns discourage me, since often fundamentals don't track stock performance.
But this doesn't seem to be the case for Marvel. Its trailing free cash flow to enterprise value multiple is a reasonable 8.5. Marvel's debt-free balance sheet, 30% return on equity, and 29% net margins are impressive, approaching those of Microsoft (NASDAQ:MSFT), Oracle (NASDAQ:ORCL), or Adobe (NASDAQ:ADBE). These ratios will worsen this year, since Marvel has used up tax credits, which will cause its tax rate to increase. Nevertheless, it has such potential that I've been considering buying it.
The only thing that has held me back is concerns about management remuneration. Avi Arad, the chief creative officer, and Isaac Perlmutter, the vice chairman, are compensated in ways that make me worry about whether they are always acting in shareholders' best interests.
Last year, Arad made $625,000, plus options, which is reasonable given his position. But in addition, he is paid for tasks he does for the company. Arad owns 100% of two companies working for Marvel, a production company and toy designer. The production company earns at least $350,000 per movie, $627,500 last year, while the toy inventor received royalties of $867,000. It's unusual to pay Arad as a Marvel employee but allow him to retain ownership of intellectual property such that Marvel is required to pay him licensing fees.
Perlmutter, too, owns a company that shares office space and places advertisements for Marvel. It received fees of $157,000 last year. But the oddities go beyond that. In 2001, Perlmutter personally guaranteed up to $30 million of Marvel's $57 million credit facility, similar to a parent co-signing a loan. In return, he received warrants to purchase 4.6 million shares at a price of $3.11, with a fair value of $13 million. Perlmutter exercised these warrants for a profit of $91.5 million in September 2003, when Marvel was trading at $23.
These unusual arrangements might be completely legitimate. Perhaps they're a way to link compensation to performance or are for tax-reduction purposes. But I'm concerned about potential conflicts of interest and that management is acting like they're running a private company, not a public one. I may still end up buying Marvel, but these agreements have given me pause.
To understand why I'm still thinking about Marvel, check out:
To find out what David Gardner sees at the next potential high-performer, check out his new Rule Breakers newsletter.
Richard Gibbons does not own any of the stocks owned in this article, though he's considering Marvel.
