Shares of Marvel Entertainment
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
Like peers Walt Disney
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:
- Marvel generates a ton of cash.
- 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
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
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:
- More than a year later, this stock is still a screaming buy.
- No bailout needed here, thanks.
- Watch closely, Fool. When it comes to this stock, there's more than meets the eye.