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Are there $$$ in Spider-Man's web?
Comic book movies are big business and that could be good news for Marvel Enterprises.
May 6, 2002: 1:48 PM EDT
By Paul R. La Monica, CNN/Money Staff Writer

This is an updated version of a story originally published on April 4.

NEW YORK (CNN/Money) -- The official start of summer is more than a month away, but the summer blockbuster movie season kicked off last Friday with the release of "Spider-Man".

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The movie made box-office history in its first three days, taking in $114 million. And now investors want to know what the early success will mean for Marvel (MVL: Research, Estimates) Enterprises, whose shares have already surged more than 120 percent this year.

Marvel, known for characters such as Captain America, the X-Men, and of course, Spider-Man, has undergone a stunning transition since its bankruptcy in 1996, most recently cashing in on Hollywood's new love affair with comic books.

The company has a 50/50 joint venture with Sony (the movie's distributor) to share the merchandising revenues from Spider-Man movie products, such as t-shirts, video games and the requisite fast food tie-in (in this case with Hardee's). In addition, Marvel CEO Peter Cuneo says the company will participate in the box-office take and also get a cut from video and DVD sales.

Cuneo wouldn't disclose what Marvel's cut will be, but the structure is significant because Marvel used to receive only a flat licensing fee from studios. As a result, the company never participated in the upside of hits like the original X-Men movie. "Those days are over," says Cuneo.

Marvel has similar box-office sharing and licensing agreements in place for three movies set to be released in 2003. "Daredevil" stars Ben Affleck as the blind New York lawyer who uses, as Marvel describes it, "hyper-developed senses of hearing, smell and touch, and extraordinary acrobatic abilities" to fight crime.

"X-Men II" has Oscar winner Halle Berry reprising her role as the weather-controlling mutant Storm. And "The Incredible Hulk" is being directed by Ang Lee of "Crouching Tiger, Hidden Dragon" fame. (We're crossing our fingers for a Lou Ferrigno cameo.)

What's more, Cuneo says that a Spider-Man sequel is already in the works and that Artisan Entertainment is developing a film based on Marvel's vigilante hero, The Punisher. Hopes are so high for these movies that Cuneo expects the company to be profitable in 2002 and 2003 before one-time charges. Marvel reported a $27.5 million loss in 2001 (excluding a one-time gain) and an $89.9 million loss in 2000.

Licensing is big bucks

Profitability would be nothing short of miraculous for Marvel when you consider its recent past. The company's 1996 bankruptcy filing came after being saddled with loads of debt by its former owner, investor and Revlon chairman Ronald Perelman. Perelman bought Marvel in 1989 and went on a disastrous acquisition spree, scooping up trading card companies Fleer and Skybox as well as sticker company Panini. Each division has been since sold off.

Ultimately, Marvel was able to emerge from bankruptcy in 1998 by merging with Toy Biz, a manufacturer that had the rights to make toys for Marvel characters. Toy Biz changed its name to Marvel Enterprises.

Although Marvel had found a white knight, the company still had many problems, the biggest being its reliance on toy manufacturing, a big money-loser.

Enter Hollywood. The success of the X-Men movie proved that comic-book franchises could be big hits. Cuneo, hired as CEO in 1999, decided to de-emphasize the toy business and focus more on licensing, which has been steadily profitable. "We want to expose our characters to as many appropriate media streams as we can. We view ourselves as agents for our characters," says Cuneo.

Marvel signed a five and a half year licensing agreement in July 2001 with an unaffiliated company called Toy Biz Worldwide, based in Hong Kong. Toy Biz Worldwide will make most of the Marvel character toys and action figures and Marvel will receive royalty fees.

Revenue from Marvel's toy division accounted for just 34 percent of total sales in the fourth quarter, down from 72 percent in 2000. Profitable licensing fees made up 35 percent of revenue, up from just 8 percent.

And even though overall revenues declined by 22.5 percent in the quarter, Marvel reported a profit of $3.4 million (excluding a one-time gain) in the quarter thanks to the more favorable business mix. In the fourth quarter of 2000, Marvel lost $53.4 million.

Not out of the woods yet

So is Marvel a good investment now? The company is on the right track but there are still several risks. The stock has already had a heroic run. And stocks that depend on big hits and pop culture fads tend to be volatile. Remember 4 Kids Entertainment (KDE: Research, Estimates)? This company has the licenses to Pokemon characters, and the stock surged 663 percent in 1999 during the height of the Pokemon craze, trading as high as $93.25 in November of that year. Now the stock trades at just $16.95, 82 percent off its peak.

Another toy company has enjoyed an amazing pop this year due to Spider-Man. Shares of Grand Toys International (GRIN: Research, Estimates), a tiny company that lost money last year but has the rights to sell Spider-Man action figures in Canada, have nearly tripled since March, to a little less than $4. But, then, Grand Toys also participated in the rise and fall of Pokemon, trading as high as $70.25 in November 1999.

To be sure, Marvel has a healthy stable of comic book characters that studios are eager to mine so there's less of a risk of Spider-Man being Marvel's one hit wonder. But other factors that could hold the stock back are its balance sheet. The company had $181.8 million in long-term debt as of the end of 2001. While that's down from $250 million at the end of 2000, Marvel has only $22.8 million in cash.

Also, there is no Wall Street coverage of the stock (and hence no earnings estimates) and very few mutual funds own the stock. The lack of estimates makes it tough to come up with a reasonable valuation for Marvel. For what it's worth, the company trades at about 1.6 times trailing sales. Cuneo says the company is actively trying to drum up more instructional and Wall Street support for the stock.

And there are no public companies to compare Marvel to either. DC Comics, the second largest comic book publisher, is but a small part of AOL Time Warner, which also owns CNN/ Stan Lee Media, the online comic book company founded by former Marvel chairman Stan Lee, filed for bankruptcy last year and shut down.

Finally, there's another issue worth mentioning. Due to the bankruptcy, Marvel has been forced to make sizable preferred dividend payments each quarter to shareholders who acquired preferred stock in 1998. The primary owner of these shares is Isaac Perlmutter, Marvel's vice chairman and the former owner of Toy Biz. This takes a chunk out of Marvel's bottom line. The quarterly profit Marvel had in the fourth quarter turns into a $710,000 loss once you factor in the $4.1 million preferred dividend payment.

All in all, Marvel is certainly in better shape now than it was a few years ago. But will the latest crop of comic book movies generate big box office numbers and huge merchandising sales? Will profits join the Hulk as big green things associated with Marvel? Stay tuned for the stock's next amazing adventure.  Top of page