Shares of Marvel Entertainment (NYSE:MVL) have poked into the black for the year this week, but for my money, this could be just the beginning of a new round of gains for the stock.

Marvel soared more than 6% after reporting earnings that blew away earlier estimates. Revenue rose 75% to $197 million, while per-share income fell by a penny to $0.57. Both results easily topped the Street's targets.

Meanwhile, Marvel's newest film, X-Men Origins: Wolverine, made in cooperation with News Corp.'s (NASDAQ:NWS) 20th Century Fox, slashed competitors in its opening weekend. Hugh Jackman's first solo outing as the often-angry, always-indestructible mutant took in $85 million at the domestic box office and another $73.1 million outside the U.S., Box Office Mojo reports.

Like peers Walt Disney (NYSE:DIS), Time Warner (NYSE:TWX), and DreamWorks Animation (NASDAQ:DWA), Marvel's characters -- old and new -- are drawing patrons to theaters.

As if that mattered ...
If only the Street cared. Analysts have downgraded Marvel's stock three times since the beginning of the year. Caris & Company has done it twice, for example.

Wedbush Morgan, on the other hand, can't make up its mind. On Feb. 17, shortly before Marvel issued an outstanding fourth-quarter report, analysts there upgraded the stock to "buy." This morning, they dropped their rating back to "hold."

To be fair, Wedbush has done well with its pick. Calling a buy at $25.10 -- Marvel's closing price on Feb. 17 -- looks brilliant now. But why the downgrade, Wedbush? Why not buy again?

Perhaps because there's still a broad misunderstanding about how well-positioned the Marvel Studios business is, when it really ought to be obvious:

Components of Adj. Cash From Operations

Last 12 Months*

2008*

2007*

2006*

Reported net income

$198,964

$205,535

$139,823

$58,704

Depreciation and amortization

$1,457

$1,559

$5,970

$14,322

Amortization of film inventory

$206,390

$135,339

$0

$0

Amortization of financing costs

$4,980

$4,981

$4,980

$4,980

Deferred revenue

$9,600

($16,509)

($28,956)

$140,087

Film production costs

($37,770)

($53,135)

($251,045)

($15,055)

Net borrowings from film facility

($273,583)

($74,209)

$255,926

$7,400

Capital expenditures

($3,052)

($2,384)

($2,659)

($16,286)

Adj. Operating Cash Flow

$106,986

$201,177

$124,039

$194,152

Sources: Press releases, SEC filings.
*Numbers in thousands.

Two things should jump at you in reading this table:

  1. Marvel generates a ton of cash.
  2. So much cash, in fact, that it cut its net film debt by more than $270 million.

Impressed? You don't know the half of it. Turns out Marvel actually repaid more than $330 million in gross film borrowings. Today, the company owes its cinema creditors just $61.9 million, down from $204.8 million at the end of December.

An adamantium-clad deal
Something else to realize -- yes, this is the important part -- is that Marvel was generating these numbers under less generous distribution terms, and before it signed Samuel L. Jackson, who made a key cameo appearance in last year's blockbuster, Iron Man, to a nine-picture deal.

Jackson's arrangement is sweet, but Marvel's distribution deal with Viacom's (NYSE:VIA) Paramount Studios is sweeter. The partnership calls for Paramount to handle distribution worldwide -- previously, Marvel had been required to presell foreign territories through regional partners -- and to cut its producer fee by two points, from 10% to 8%. In exchange, Marvel will fund the first third of production of future films, beginning with Iron Man 2, through its bountiful free cash flow.

That's admittedly a riskier deal than before, but I'm not worried. Marvel operates the fourth-largest licensing business in the world, according to License Global magazine, and boasts a history of careful capital management:

Metric

Last 12 Months

2008

2007

2006

Earnings before interest and tax

$353.90

$348.64

$273.03

$110.16

NOPAT (37.5% tax rate)

$221.19

$217.9

$170.64

$68.85

Avg. Invested Capital

$520.36

$540.16

$387.86

$345.75

ROC*

42.5%

40.3%

44.0%

19.9%

*Return on capital.

For context, consider that not even Google (NASDAQ:GOOG) manages those sorts of returns. In fact, on this basis, the search king is less than half as good as Marvel.

So let analysts say what they want. Let them scream about how it's time to take profits, about how this rally is ridiculous, and how only a (small-f) fool would buy now.

They're wrong. A fool wouldn't buy Marvel now, but a Fool would.

Face front, True Believer! More Marvel-ous Foolishness awaits:

Disney, DreamWorks, and Marvel are Stock Advisor selections. Disney is also an Inside Value pick. Google is a Rule Breakers recommendation. Try any of these Foolish services free for 30 days.

Fool contributor Tim Beyers is also an analyst for Motley Fool Rule Breakers. He had stock and options positions in Marvel and Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is the best there is at what it does.