Motley Fool Stock Advisor recommendation Marvel Enterprises (NYSE:MVL) is well on its way to having $200 million cash, and no debt, by the end of the year. Today, the company announced that third-quarter net sales rose 60%, operating income was up 44%, and net income was down 46%.
The net income drop was caused by Uncle Sam. Marvel has exhausted its tax credits, and the result of being a tax-paying corporate citizen was a $45.8 million "tax swing" -- more like a high-impact uppercut to the financial chin but good news for America.
The softness in the net income increase is tied to the quarter's higher reliance on toy sales rather than the higher margin licensing of the company's stable of 5,000 characters.
Income increased in all three divisions (licensing, publishing, and toys). Operating income, though, decreased for toys because of higher advertising and promotional spending before the competitive holiday season.
What investors were waiting to see was the company's 2005 guidance. The Sony (NYSE:SNE) film Spider-Man spiked 2004 movie and toy revenue and earnings. But 2005 has an Achilles heel -- a sharp increase in development expenses for 2006 projects.
Three feature films will produce revenue in 2005: Blade: Trinity, being released by fellow Motley Fool Stock Advisor recommendation Time Warner (NYSE:TWX) in December; and Elektra and Fantastic Four, both from Fox (NYSE:FOX). Six feature films, four direct-to-video original animated features for a partnership with Lions Gate (NYSE:LGF), and a Fantastic Four-based animated TV series will be in production for 2006.
As expected, without Spider-Man's U.S. release, 2005 revenue is expected to drop $110 million from the up-to-$500 million expected for 2004. Surprisingly, 2004's net income of up to $111 million will be surpassed and come in at $126 million. The 2005 results won't include a $12 million charge for the early retirement of debt and Spider-Man's international box-office receipts and worldwide DVD income.
In the past, Marvel has been conservative with its earnings forecasts. But it is worth noting that as its characters have established themselves as financial superheroes, and the company has become as cash rich as supervillains, it has been able to negotiate better contracts. Still, there is substantial risk in making any projections for a movie and toy business.
Wall Street liked today's news and sent the stock up 10%. Long-term investors will relish the company's earnings multiple of 16, growing financial muscle, and powerful 2006 lineup.
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Fool contributor W.D. Crotty owns stock in News Corp. (Fox's parent) and Marvel.
