Why Marvel's Still a Multibagger Opportunity

Welcome back to Dueling Fools. As I did last Friday, I'm continuing to argue that you buy Marvel Entertainment (NYSE:MVL) and sell Walt Disney (NYSE:DIS).

My job isn't easy. Disney is a mostly dependable performer, an entertainment giant with interests in cable, cruise ships, theme parks, toys, and movies. Marvel is the wannabe here -- a concrete-jungle dweller craving a little of Tinkerbell's fairy dust.

Why you should buy the wannabe
OK, more than a little. Marvel is growing up to be Disney 2.0, thanks to a massive licensing machine. License Global magazine says Marvel's various imprints -- born of some 5,000 superhero characters -- helped create $5.7 billion in retail sales. Notable brands that trail Marvel in this area include Mattel (NYSE:MAT), Harley-Davidson (NYSE:HOG), and Coca-Cola (NYSE:KO).

Interestingly, although Marvel's slice of the licensing pie has grown tremendously in recent years thanks to big deals with Hasbro (NYSE:HAS) and others, it's still tiny on a percentage basis:

Sources: License! Global and Capital IQ, a division of Standard and Poor's.

Contrast that with Disney's Consumer Products group, which gets a heaping helping of license pie:

Sources: License! Global and Capital IQ, a division of Standard and Poor's.
Totals organized by fiscal year, which typically ends on Sept. 30.

These numbers should be greatly encouraging to Marvel investors. There's room to grow the business in both absolute  (pursue more licensees) and relative (earn more from each sale) terms.

Hulk smash puny box-office estimates!
When it comes to Marvel, investors most fear that a box-office stinker could torpedo the company's leveraged balance sheet. After all, who pays the tab if audiences don't show? Marvel.

But this fear is mostly unfounded. Take last year. Lions Gate's (NYSE:LGF) sequel Punisher: War Zone was a bust that cost $35 million to make, but took in just $10.1 million at box offices worldwide, Box Office Mojo reports.

Or how about The Incredible Hulk, which earned a modestly disappointing $134.8 million domestically and $263.4 million worldwide, and which cost $150 million to make? And that's likely before prints and advertising costs.

So the green guy was a money-loser, right? Wrong. "Yes, both films, both profitable," Marvel Chief Financial Officer Ken West said during the company's third-quarter 2008 earnings conference call, answering an analyst who questioned whether The Incredible Hulk would put cash in Marvel's coffers.

DVD sales may have been the tailwind. The Hulk's celluloid encore generated $58.1 million in DVD sales, according to industry tracker The Numbers. DVDs are generally cheap to produce and tend to boast very high profit margins.

SMASH-ing the rules
Marvel is also the innovator in this contest. Sure, Disney has its own universe when it comes to movies, but there's typically little continuity in Disney and Pixar films. Crossovers are virtually nonexistent. Mickey and Donald don't visit Woody and Buzz on screen.

Perhaps they should. Robert Downey Jr., star of last summer's hit Iron Man, made a cameo as Tony Stark at the end of The Incredible Hulk, and executives talk as if Marvel Studios films are being woven into a sort of cinematic universe that will resemble the comic books that inspired them. A nine-picture deal for actor Samuel L. Jackson to play super-agent and Avengers overseer Nick Fury should aid with that effort.

Marvel is still discovering its cinematic powers; Disney's were proven long ago. But if you already know that, you know what you're paying for with the House of Mouse. That leaves Disney offering few surprises -- and even less upside.

Move aside, Mickey. There's a new superhero at the box office.

Get your clicks with related Foolishness:

• Read Rick's original argument, and his rebuttal.
• Iron Man is way bigger than you think.
• Here are 3 more reasons to love Marvel right now.