11 September, 2008

Marvel Entertainment holding up well in Turbulent Markets

It's been a hum-drum year for the Entertainment business as the US economy sputters along, dealing with high oil, housing prices, unemployment and inflation. Even though the big Summer Box Office totals were in line with records set last year, the higher average ticket price was what kept up the pace. There's only so much a Man of Iron and a Dark Knight can do!

One company that has gone against the trend this year has been Marvel Entertainment (MVL). Year-to-date the stock has risen almost 30% on the strength of its first independently financed films. Marvel took a big gamble financing its own movies and so far the endeavor has gone about as well as the company and shareholders could have hoped. The success of the first Iron Man movie, which has now grossed over $570Million at the worldwide box office, has prompted a quick sequel scheduled for 2010, along with a film about another hero, Thor, the same year. Marvel also planned 2 films thus far in 2011, including a Captain America story and a cross-over super hero film about The Avengers, a team which will likely include Iron Man, Thor, Captain America and the star of Marvel's second summer bow The Incredible Hulk.

While Marvel's Hulk didn't capture the same movie-goer enthusiasm as Iron Man, the stigma of the previously panned Hulk film was a tough hurdle to overcome. Nonetheless the film is nearing $250Million at the worldwide box office, and poised to get a 3 version treatment on DVD and Blu-Ray.

While the Christmas season is typically a sales boom for most industry, Marvel is well positioned to capitalize on its fan base, with not only DVD releases of Iron Man and The Incredible Hulk, but also updates to their respective toy lines along with the staple of the company, the comic book publishing and video game licensing business. Marvel has also recently entered into an agreement with Japanese anime studio Madhouse to create a version of the Iron Man story within the anime design guise. This push into International markets, with films and comics, with Marvel at the helm instead of other Licensees, will draw in a much wider fan-base than ever in the company's storied history.

The characters that make up the Marvel Universe are compelling enough to draw interest from Millions around the world, and as Marvel seeks to control more of its own creative domain it also stands to reap the benefits. Marvel's rise over the past year was a direct result of its move into the film business, and with its success established along with 4 other films planned the resulting revenue growth will lead the stock higher in the years to come.

Marvel will become a dramatic growth story and with a P/E of 17 and a forward P/E of 17 based on next year's earnings of $2/share the stock is certainly not overpriced. Not to mention that these estimates do not yet included the guaranteed success of DVD and Blu-Ray sales for Iron Man and to a lesser extent The Incredible Hulk. With it's main comic book rival DC Comics sitting as a subsidy of Time Warner (TWX), Marvel stands as a pure-play stock in the comic-book publishing and film licensing business. Marvel's only a $2.7Billion market cap company right now, which provides it an attractive platform for growth investors in the coming years as the expansion opportunities ahead of it come to fruition.

But what about 2009? Marvel isn't releasing anything itself! What happens then? The company will continue to ride DVD sales in a manner similar to Dreamworks Animation or Pixar during their 1 film per year business models. Oh and of course the company still sells a lot of comic books and related toys, along with licensing its characters to big movie studios for upcoming pictures such as Lions Gate's Punisher and next year's blockbuster Fox's X-Men: Wolverine. As if the whispers of Spider Man Parts 4 and 5 coming down the pipeline in the coming years wasn't enough.

Are you sold yet?

Disclosure: Author owns MVL


Kevin Phillips said...

When did you get into MVL?

Chris Krasowski said...

MVL had been on my main watch list for some time, since prior to Iron Man coming out, I've owned it from around that time as well but I've been building onto the position as the stock had come down following Hulk. Average cost is $32.

On an aside, I've found MVL to be a a very good Covered Call Options play, paying around $1/share on the one month out $35s, it has been the 3rd month in succession that I've employed this strategy on top of my position.