Last week was neither super nor heroic for Marvel (NYSE:MVL) shareholders. The superhero stronghold crumbled to pieces as the company's third-quarter results came up lame, and the company warned that next year will only be worse.
Then again, if you've read any of the Marvel comics or caught any of the films based on the company's impressive fleet of characters, I don't need to tell you where we are in the story. This is the part of the tale where our hero's head begins to fill up with doubt. Lack of confidence. Mixed messages from the outside world. Do I fit in?
You know what happens next, right? The metamorphosis. Our heroic stock begins to come to grips with the gravity of the situation and to harness its superpowers for the greater good. Will Marvel follow suit?
I should point out that Marvel is a popular stock in some Foolish circles. The stock has been a big winner since David Gardner recommended the shares three summers ago to members of the Motley Fool Stock Advisor newsletter service. The stock is not an active recommendation in Rule Breakers, though it was the subject of the first premium research report issued to its subscribers.
By the same token, you shouldn't take me as some comic book Pollyanna. Back in June, I rattled a few Marvel bulls when I argued that Marvel was due for a fall. Action flicks had been petering out at the box office. It was taking a big chance with its move to start bankrolling its own films. The company was in the middle of a three-year run that called for flat earnings growth at best. Then again, the stock was at $20.40 at the time. The stock started out this week 30% lower.
The bullish transformation begins
Okay, so I was never what one would call a Marvel bear. I just had my concerns. Actually, one of my biggest worries was that Fantastic Four would be a theatrical dud, and I was wrong. It held up relatively well this summer.
What about the company's disappointing September quarter? Well, what about it? Earnings per share were off by 23% on a 40% dive in revenues. It doesn't read well, but this is a licensing company, where results will be lumpy. The real shock to the system was that the company is now expecting to earn between $0.37 and $0.52 a share for all of 2006. That's less than half -- and perhaps even closer to a third -- of what Marvel pocketed last year.
On the surface, it's easy to see why shareholders bailed. The company behind classic franchises like Spider-Man, X-Men and Hulk was floundering. By its own estimation, pre-tax earnings peaked last year -- after-tax profits actually peaked in 2003 -- with no chance of getting back to those levels through 2007 at the earliest. Quarterly results fluctuate, and that was a given, but now annual results were in serious disrepair, with three straight years of bottom-line declines.
Well, here's where it pays to have a slightly longer view. I hate arguing that the next few quarters will be irrelevant, but, quite frankly, they might as well be. Sony (NYSE:SNE) has been very good at milking Marvel's Spider-Man franchise, but Spider-Man 3 won't hit theaters until May of 2007. We'll see X-Men 3, Ghost Rider, and The Punisher 2 before then, but Spidey's been the hottest meal ticket for Marvel. Making matters even better for those willing to hold their noses through the end of next year, the Fantastic Four sequel will also be out in 2007.
The company also has some animated projects cooking for 2006, including a Fantastic Four television series and a direct-to-retail Avengers DVD. No one is going to confuse Marvel with Pixar (NASDAQ:PIXR) or DreamWorks Animation (NYSE:DWA), but these animated ventures will give Marvel some new revenue streams to paddle.
This will all ultimately lead us to 2008, when the company begins putting $525 million in intellectually collateralized financing to work by releasing its own features -- Captain America, for one. It will be a very risky undertaking for Marvel, but after watching movie studios keep such a big share of the profits from its past successes, it is clearly what the company will have to do.
Wake me up when 2006 ends
Despite weakness in the company's licensing and toy businesses, its original publishing world has been growing just fine. It's up by 8% so far this year, and the company expects continued improvement there next year, too. Publishing may only be a quarter of Marvel's business these days, but if it continues to improve into 2007, it will stand alongside the company's strong 2007 movie slate, with a fair shot at landing record results for the company.
But you can't see that far, you claim. You're not patient enough to stick it out. You may have a point, when you figure that Wall Street can be as impatient as it can be insolent. That's why you might be ready to forget about Marvel for the time being and leave yourself a note to check back for an entry point two summers from now.
That could be a big mistake. For starters, if Marvel's stock meanders in the low teens -- or even dips into the single digits -- do you really believe that no major media company will attempt a buyout?
You also have many potential runways along the way. Don't you think the stock would take off if Marvel were to start creating exclusive video content for Apple Computer's (NASDAQ:AAPL) video-enabled iPod? The company has attractive long-term video game deals with Activision (NASDAQ:ATVI), but what if it were to wake up to the online gaming and community-endearing possibilities? Paid search giants like Google (NASDAQ:GOOG), MSN.com, and Yahoo! would love to help Marvel monetize a more visible dot-com future.
That's why it's tricky to abandon Marvel now, just because so many shareholders voted with their feet last week. Companies carry cheap, short-range flashlights, so I'm not blaming the market for freaking out when it learned that Marvel will be lucky to earn $0.50 a share next year. That's as far as Marvel's flashlight is willing to shine -- publicly. However, once you start looking at the company's 2007 releases, its own in-house efforts a year after that, and all of the opportunities and buyout buzz that may materialize between now and then, ask yourself this: Are you nimble enough to carve out an exit and re-entry strategy on the fly?
"I'm not buying Marvel at as much as 38 times next year's earnings," they say.
Wait two months. Ask them again how they feel about Marvel "next year," which will then mean 2007. Yes, financing its own film slate is risky. It's a gamble for the company that transformed its balance sheet into debt-free, preferred stock-free perfection over the years to start borrowing money to buy back shares and sit in a director's chair. Then again, stagnancy kills.
Now that the market has turned the other way, I can admit that I like a Marvel that is willing to take some chances. The once-popular belle of the Motley Fool Stock Advisor Ball looks enticing as it changes outfits in a dark corner. Turn, superhero, turn.
Marvel, Pixar, DreamWorks, and Activision have all been Motley Fool Stock Advisor recommendations.If you're looking for great stocks at great prices, let Fool co-founders David and Tom Gardner be your guides with a free trial to our Stock Advisor service.
Longtime Fool contributor Rick Munarriz enjoyed the Spider-Man and X-Men sequels even more than the originals, but he hasn't exactly been won over by Marvel's other theatrical incarnations. He does own shares in Pixar. The Fool has adisclosure policy. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
