Disney's Marvelous Bet on Superheroes

The Walt Disney Company (DIS) set its mouse ears on the biggest name in comic books in a purchase agreement that will bring all of Marvel Entertainment's (MVL) characters into the Disney fold. The $4Billion purchase agreement with Marvel is similar to Disney's previous $8Billion buy of animation powerhouse Pixar, which has already reaped dividends with film, toy and video sales of features Wall-E and this summer's hit Up.

Marvel, a newcomer in the movie production business, but with two self-financed films under its belt and another four in development is riding a high after the blockbuster success of Iron Man and the subsequent revenue tail that film has provided. With the eagerly anticipated sequel set to be an even bigger box-office draw, the opportunity was ripe and Disney went after it. Marvel's upcoming film slate looks like this:

=> Self-Financed films including 2010's Iron Man 2, 2011's Thor and Captain America films, and the 2012 team-up Avengers. But that's just the beginning, as a possible Incredible Hulk sequel, a S.H.I.E.L.D. or Nick Fury film and potential franchises from the core Avengers characters all lie in wait for initial movie-goer reaction.

=> Licensed films include Sony's 2011 Spiderman 4, upcoming Fox films Wolverine 2, Deadpool, X-Men First Class, and Origins Magneto, and there's talk in Hollywood circles about reboots to the Daredevil, Fantastic Four and Blade franchises.

The film slate at Marvel looks incredibly promising, so why sell out at $50/share? That's a question Marvel shareholders will get to ask as although both company boardrooms have approved the deal, the MVL shareholders must also give their permission. Given the profitability of the Iron Man movie franchise and the chance of a second hit with either Thor or Captain America, all moving towards the much-anticipated Avengers film, begs the question whether Marvel needed a big brother. Marvel finds itself in a very positive business cycle as its films generate interest in its comic books, which generate interest in more films and toys and videos, but I believe Marvel's thinking is growing ever-more global and it needs a partner to showcase its characters further around the world.

Disney theme parks with various Marvel characters and tailored rides, bigger opportunities in television for Marvel's growing animation team and the increased presence at the negotiating table for localized global expansion of movie, television and print properties give Marvel a cushion it didn't have before when it ventured on its own. But, most importantly, I think Marvel have watched and learned from the Pixar model, and as Pixar was embraced into the Disney fold, it has been allowed to run and create as it had before and even more so. Critically, the last two Pixar films have been labelled as the least commercial and least accessible, and still among its best to date. In the end creativity prevailed, and just as the Pixar model has taught Disney, Marvel knows that its love for its own characters and creative process will be left with the creators and not a corporate conglomerate.

Prior writings at WC Power Tech Fund about Marvel, here (Link), here (Link) and here (Link), with the premier of Iron Man and beyond, talked about how the strategy was very sound and the stock could easily double from its $2-3Billion market cap within the next few years as it pressed on with its film strategy. That was around the $30/share range and Marvel admirably was able to withstand the market's recession wrath better than most, eventually faltered with the market but was quickly embraced again by investors at close around $38 at the end of last week. Now while this deal makes a lot of sense in many ways, Marvel should've been worth significantly more than $50/share on its own as its Avengers assembled.

Disclosure: Author owns MVL, DIS

Stock Climb continues, S&P above 900

Despite what should have been a corporate backlash against recently announced plans by President Obama to curb corporate Tax Havens and loopholes, markets brushed off worries with a shrug and kept pushing higher. This sent the Dow to the green by 200 points, while the S&P however was the big winner of the day, climbing higher by 3.3% to finish at 907.

The changing tax rules, which are estimated to bring in $210Billion in additional tax revenue over a decade, are in part a response to the growing easiness by which corporations shelter income with offshore holdings offices in countries with low to nil tax rates. By having these subsidiaries, overwhelmingly popular with Financial Institutions, which ironically are the same ones who have taken most of the $700Billion in TARP bailout money, companies can avoid paying taxes by shifting money around and through other countries. Considering a report from January pegged 83 out of the 100 biggest corporations having overseas "offices" in tax havens, the amount of money in lost tax revenue adds up.

The 2nd part of this change is driven by economics, as incentives are re-created in order to spark employment and investment in the domestic United States. Previous policies and tax incentives had been adopted to spark International Investment, however, the current unemployment situation in the US has made keeping Americans employed a top priority for the new Administration.

In other news, despite the tie up with Italian car maker Fiat, amongst other restructuring plans, Chrysler still anticipates losing nearly $5Billion in 2009, with a minute return to profitability by 2012.

Financials continued to rally again today, despite Fed Stress Test results that are likely to indicate several banks that need additional capital. Amongst those, it is being reported that Bank Of America (BAC) is looking to raise $10Billion in fresh equity capital. The stock today was up almost 20% compared to the Financial sector's gain of nearly 6%.

The summer movie season is getting started, and that means it is the time for the popcorn blockbuster. First up is a continuation of the X-Men franchise from 20th Century Fox, a studio owned by News Corp (NWS). The X-Men comics were created by Marvel Entertainment (MVL), and the first 3 films in the franchise has grossed over $600Million in domestic box office. X-Men Origins: Wolverine tells the origin story of the most famous mutant of the group and despite the sting of a piracy leak, which put an unfinished version of the film on the Internet a whole month before release, the film managed excellent $87Million domestic and $160Million Worldwide box office tallies. The popularity of the character is surely showing among movie fans and this will likely mean a continuation of other Marvel properties that Fox has the license too. Marvel itself also stands to benefit as its license fees are typically tied to box office receipts and up front payments.

So with the March and April rallies continuing to mount, is it time to take some profits? Since March lows, the S&P is up 220 points, or 32%, and with an economic situation just barely showing some glimpses a case can be made that the markets have gotten ahead of themselves. Taking some off the table would be a prudent thing to do for Investors, however any leg down or significant down day is an opportunity as valuations are still attractive and the S&P is just broken even for the year.

Disclosure: Author owns MVL, holds puts in BAC

Rally Continues past April Fools

The 2nd of April, typically a let down day for pranksters has markets rising like the Sun in the East. North American markets had spent March on an absolute tear, had the Madness from the NCAAs spread to the trading floors or was there finally something to be optimistic about?

Well, first and foremost the G20 summit has economists, investors and the media talking, which is always a good thing, especially if what's being talked about is recovery. Not only recovery, but how to get there. The month of April has opened with positive market gains despite a jobs situation in America that if taken by the numbers seems as dire as ever. Jobless claims rose to about 670,000 in America at the end of March, as high a figure as has been seen since 1982, but the G20 leadership, and that leadership's commitment to economic strength going forward has investors optimistic.

The latest reports out of the G20 summit have leaders close to agreements on stricter financial rules, including the use of tax havens, and a planned influx of money to the International Monetary Fund in order to help fight the global recession. This total could reach upwards of $1Trillion based on the unveiling of the plan by Britain's Prime Minister Gordon Brown.

It isn't just the G20 that has been providing the spark of late. In the Auto Industry, one of the hardest hit by the curbing of consumer spending, Toyota (TM) showed a sales increase of 18% in March, compared to February of this year, which led of a Vice President at the company predicting that Toyota has seen and moved past the bottom in slumping car sales. Toyota is up 14% in the last two sessions.

Piracy, a long and hotly debated issue came to the forefront of the press yesterday as a major 20th Century Fox motion picture was leaked online a month before its theatrical release. X-Men Origins: Wolverine, which is a follow-up to the hugely successful X-Men franchise for Fox and its parent News Corp (NWS) and based on the characters created by Marvel Entertainment (MVL), was set to be a summer blockbuster and tent-pole film for the studio. An unfinished, but DVD quality version of the movie somehow found its way around the Internet for fans and commentators alike to have a look. How this plays out in the month ahead is guess-work but bad word of mouth amongst the core fan-base could spell trouble for Fox, which is coming off of an abysmal 2008 movie year.

The first weekend box office for comic book movies depends heavily on the core fan-base and intelligent marketing, but if the movie doesn't live up to expectations and the core fans get to see it in nearly completed fashion a month prior to release, the effects of piracy will be felt harder here than ever before in Hollywood. News Corp, being the giant conglomerate that it is, is unharmed for now as the stock has risen 7% today along with the broader market.

Today's continued bullish sentiment was broad, with seemingly all sectors moving higher. The Dow, which has broken 8000 this morning is joined by its American benchmark brethren with gains of nearly 4% as of this writing. Question is, should investors be cautious for when the Sun sets in the West in the weeks ahead?

Disclosure: Author owns MVL

Marvel shines its profitable Iron... Man

Beating street estimates for Marvel Entertainment (MVL) has become the norm, with a 6th straight quarter of analyst trouncing results. Clearly the comic book company's foray into the film business has been successful. The numbers show the tremendous potential of a successful film franchise, and Marvel's expecting a 2nd and 3rd.

Coming in at $0.80/share profit for the quarter, a beat of 8 or 9 cents according to the various Wall Street average estimates, Marvel shined in early trade with shares up about 15%. A stock that was flying in the mid 30s after the successful run at the box office of Iron Man has been resilient but not immune to the economy of late. Marvel had held up better than most stocks over the last several months but with selling pressure mounting market-wide, Investors were fleet of foot here also. Marvel fell below $24 before today's rebound on strong results and re-affirmed guidance.

Perhaps the most telling strong sign of the Marvel story is the re-affirmation of previous guidance. Marvel guided 2009 in a range of the $1.00s to the $1.30s, which a rarity in today's economics is unchanged from previous verbiage. This kind of confidence, considering Street estimates for Marvel's 2009 average around the $1.20 mark, has spurred renewed confidence that the company can and will be a growth story in the years to come.

Revenue for the quarter came in at $224 Million (profits of $63 Million) and closing out the record year were numbers of $676 Million in Revenue with $205Million at the bottom of the Income statement. A big chunk of this was due to Marvel Studios with the Iron Man and Incredible Hulk films that opened in the summer of 2008. Iron Man DVD and Blu-Ray sales, according to Marvel were the biggest drivers of the quarterly revenue spike at the culminating quarter of last year.

Investors see 2009 as a watershed year for Marvel as average estimates of $1.20 are off significantly over the $2.61 Marvel posted for 2008. What the Street does realize however is that Marvel stock can not be a complete P/E story but has to be an Entertainment cyclical story. With no self-financed films on its plate in 2009, Marvel must rely significantly on licensing and publishing revenue. As an aside, the company has declared that it will recognize most of The Incredible Hulk DVD revenue over 2009 as opposed to Iron Man DVD revenue which provided the boost in the December quarter. Marvel will reap licensing revenue from the Wolverine film over at Fox Studios as well as from its own slate of Animated straight to DVD releases and various television projects.

The real story is growth in Marvel as a brand and a business! With earnings of $2.61/share in 2008 with 2 self-financed films, Investors see the upcoming slate of 2 films in 2010 and 2 films in 2011 and begin to get bullish behind this story. With Iron Man 2 scheduled for 2010 and the highly anticipated Avengers combination film in 2011 Marvel has tapped a Revenue stream that it can call upon for the next several years. Marvel Bulls expect both those films to be successful but if either Thor or Captain America catch on as a film franchise, the growth engine will be remarkable. Iron Man, who has captured the imagination of audiences around the Country in his first installment, is poised for bigger, better and global reaches the 2nd time around. With added anticipation for the sequel, expect Marvel to cash in from the Worldwide box office at higher rates, which will significantly add to the company bottom line.

Those in tune with the latest industry news will be quick to point out that Marvel's in the middle of more than a couple potential stumbling blocks. A lawsuit with Stan Lee Media that threatens either a large ownership change of character rights and profits or some kind of settlement, a constant barrage of bad press over acting negotiations for Iron Man 2 and subsequent films, and the seemingly rushed time-lines to get said films completed on time and on par with quality Marvel efforts. In time I think the nay-sayers will be vilified. Marvel should not and can not allow itself to be crippled now by any lawsuit, and negotiations for film roles are an ongoing process and one that should not spill over into public conversation as it has. If anything, Marvel needs to hire more PR people to keep the Entertainment Press in control and in company favour.

Marvel is a $2Billion company, with yearly profits of over $200Million in its first year of producing film. The move into the film business garnered over three quarters of a Billion dollars in Box Office receipts. With four films on the upcoming independently produced slate, plus merchandising, publishing and licensing revenue, the company has a lot of growth ahead of it. It may take until 2010 for Investors to price this in but market cap will catch earnings potential, and economic recovery will only act as an accelerator to Marvel's growth machine.

Disclosure: Author owns MVL

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.

View the full MVL chart at Wikinvest

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

Viacom, Paramount look to capitalize on Indiana Jones

Viacom (VIA) is most certainly a giant media conglomerate, but now and again an event within one business division becomes a rally cry for consumers, shareholders and potentially traders. Viacom hopes that Paramount, George Lucas and Steven Spielberg can deliver theatrical box office records with the latest installment of the Indiana Jones film franchise.

The 4th film in the series, Indiana Jones and the Kingdom of the Crystal Skull opened Thursday and is aiming for box office records over the American Memorial Day long weekend. A 5 Day domestic gross north of $150Million would be a great start for the film. Some analysts are hopeful for over $170Million. Considering the budget for Dr. Jones was around $180Million, with by most estimates, about as much spent on marketing, Paramount needs the box office to come through in a big way! If anyone can do it, it's George Lucas, as his string of successes rank very highly with cinema history's best and most lucrative filmmakers.

The worldwide theater push for the first Indiana Jones film in almost 20 years appears to have set Paramount on the right track to continue its 2008 Summer movie blitz. Paramount was the distribution partner for Marvel Studios (MVL) Iron Man, the biggest film so far this year. While Marvel gets to keep the bigger piece of the pie for Iron Man, Paramount is alone in profiting from the latest escapades of senor Indiana. Can a company as big as Viacom really move off the strength of 1 movie? Absolutely! Will it? Time will tell.

In the past, movies that have captured the imagination of the general public, and created a media frenzy, as has been seen lately with Indiana Jones, certainly have the potential to spread into the trading floors. A good start to Indy, will mean big business for Paramount Pictures and in turn its parent Viacom. Critically the film has done decently well, and it'll be repeat business that will really drive profits. While first week box office records would dominate the headlines, the real profit driver will be the first month.

That is of course, if average folk across the United States want to get into their SUVs, drive to the theatre paying over $4/gallon for gasoline. If one film had the potential to make people forget about economic troubles, it would be the adventures of Indiana Jones.

Disclosure: Author does not own VIA, does own MVL

Technology News & Market Notes: May 6th

Techno-Superhero Iron Man delivered almost $100Million at the domestic box office for Marvel (MVL) over the weekend and brought with it a shift in Market News as Technology Stocks have been the focus. Trading started the day lower but drifted towards the green as the day went on, eventually keeping the Dow, Nasdaq & S&P all with gains on the day.

Although Microsoft (MSFT) over the weekend withdrew its bid for Yahoo (YHOO), over a pricing issue, the sentiment across the street is that this deal has may have legs. Microsoft offered to raise its bid to $33/share while Yahoo remained firm at $37. Yahoo shareholders felt the brunt of the pain as Monday the stock lost 15%. A 6% rebound Tuesday, is largely attributed to Yahoo executives reiterating to the press they are still willing to negotiate. Microsoft has a couple choices, and even though they refused to go into a proxy fight to overthrow Yahoo's board of directors once, Traders seem to think a 2nd go-round is likely.

The dance with these two historic tech names will likely continue in the coming weeks and for what its worth, how badly Microsoft needs an effective brand presence in the growing Internet economy makes it pretty certain that the company will continue to pursue Yahoo, hoping this initial backing-away will build shareholder angst at Yahoo and force more favourable negotiations.

Apple (AAPL) made more headlines and extended its recent stock run as it announced partnerships with a couple carriers to expand iPhone distribution. Both deals revolve around the "sometime later this year" time-frame, so the thinking is that the European partners are waiting for the ever-so-coveted 3G iPhone to make its debut at the WorldWide Developer Conference in early June. Apple made deals with Vodafone to distribute the iPhone in 10 counties including India, Australia and Italy. Apple changed its business model for iPhone distribution in Italy by also partnering with Telecom Italia in that region. Other countries on the iPhone slate include Czech Republic, Egypt, Greece, Portugal, New Zealand, South Africa, Turkey and Canada (based on recent announcements by Rogers Communications (RCI.B)).

Disclosure: Author owns AAPL

Entertainment in the spotlight post Fed with Take-Two and Marvel

While the market initially sold off moderately after the Federal Reserve Interest Rate cut the euphoria was back in full effect Thursday with substantial gains. The buying couldn't hold early Friday though, as American benchmarks drifted lower through mid-day. On the heels of a bullish Thursday, which saw the Nasdaq led gains with over 2% in the green, markets lulled going into the weekend.

It was a week where Entertainment was given the spotlight. One of the biggest video game franchises released its fourth installment, as the global phenomenon known as Grand Theft Auto, went back to its roots of "fake New York" Liberty City and released what is sure to be the biggest video game of all time, in terms of sales of course. Rockstar Games, which is a division of Take-Two Interactive Software (TTWO), saw this release also as the biggest in its tenure as a Video Games Maker. Shares of Take-Two are up substantially over recent months due to a buyout offer by Electronic Arts (ERTS). Take-Two has thus far been holding out for..... You guessed it, More Money! But as the first week and month results of GTA IV sales come back, Investors are expecting big things for the company and that franchise going forward.

Shifting entertainment forms now, from Video Games to Films, and its clear it'll be another Comic Book Summer. With no less that 3 major blockbuster films scheduled from now till mid summer based on popular comic book characters. The twist here is that Marvel Entertainment (MVL), after years of seeing the movie business capitalize and profit substantially on successful comic adaptations, isn't standing on the sidelines anymore. Now instead of licensing popular characters to the major movie studios and watching them collect profits from ever rising ticket prices, DVD sales, Rentals, iTunes revenue etc. Marvel put it's hand in the cookie jar and decided to start financing its own movies. And Marvel studios was born. With the first creation being the expected successful movie career of Iron Man.

The company's bold business model change years ago is bound to pay substantial dividends down the road as the worldwide box-office presents Marvel with a untapped resource of revenue. Their attention to the history of their own character creations will likely provide a movie platform that the outside studios could not and should provide years of additional story and movie script ideas. Marvel is set this summer with Iron Man and its second film The Incredible Hulk and if these prove to be as successful as most expect, then Marvel Studios will certainly expand and become a major player in the land of Hollywood.

Disclosure: Author holds no position in any aforementioned companies.