NEW YORK (CNN/Money) -
This is shaping up to be the year of the comic book movie. And that's great news for Marvel Enterprises.
"Daredevil", starring J. Lo's latest squeeze, Ben Affleck, and "Alias" hottie Jennifer Garner opened on Valentine's Day. The sequel to the wildly successful "X-Men" is due out in May and the eagerly anticipated Hulk movie is coming out in June. (And yes, Lou Ferrigno does have a cameo.)
Marvel stands to benefit since it owns the licenses to all of these comic book characters. But, can its stock duplicate the superhuman 136 percent surge of last year? Marvel (MVL: Research, Estimates) had a fantastic 2002, thanks almost entirely to the success of "Spider-Man", the top-grossing film last year.
|Jennifer Garner and Ben Affleck square off in Daredevil
Marvel has yet to report full-year figures for 2002, but it pre-announced in January, saying it was expecting sales of $280 million to $285 million, about a 55 percent increase from 2001, and earnings excluding preferred dividend payments of between $28 million and $31 million, or at least 40 cents a share. This would mark the company's first annual profit after five consecutive years of losses.
Sharing with Hollywood
The company has transformed itself from one that relied heavily on a money-losing toy business to one that reaps rewards when Hollywood uses its characters in movies or television shows. For example, Marvel has a 50-50 joint venture with Sony (Spider-Man's distributor) to share the merchandising revenue from movie products and is also getting a cut of the box-office from the film as well as video and DVD sales.
This wasn't the case when the first X-Men movie came out in 2000; Marvel's previous management team simply negotiated a flat fee to use the characters. (For more about Marvel's turnaround, read: Are there $$$ in Spider-Man's web?)
Of course Marvel, like any entertainment company, is dependent on hits. So, if any of this year's comic book movies flop, that does not bode well for the company.
But, so far, investors seem to be betting the public hasn't lost its appetite for costumed heroes. Shares of Marvel are off to a good start, up more than 10 percent so far in 2003. Based on the company's guidance, the year could be better than last year since the company has licensing agreements for "Daredevil", "X-Men 2" and "The Hulk" that are similar to what it had with Sony for "Spider-Man". (Fox Entertainment Group is the distributor of "Daredevil" and "X-Men 2". Universal is releasing "The Hulk".)
It also has a licensing deal with video game publisher Activision, recently extended until 2009, that gives Activision the right to create games based on characters from the Spider-Man, X-Men, Fantastic Four and Iron Man comics, as well as an option to buy the rights to games based on movies or TV shows featuring these characters.
As a result, Marvel expects net income between $42 million and $45 million, equal to 57 to 62 cents a share, or about a 50 percent increase in earnings per share from expected 2002 results.
Pow! Take that, vile debt!
The company's balance sheet, which was seen as a problem last year, is looking a lot nicer as well. Long-term debt stood at about $150 million at the end of December, according to Natexis Bleichroeder analyst Robert Routh. That's down from $182 million at the beginning of 2002. Cash has increased from $22 million to more than $50 million.
But, perhaps the biggest change from last year is that New York-based Marvel has slashed the dividends it had to pay owners of the company's preferred stock.
After Marvel emerged from bankruptcy in 1998, Vice Chairman Isaac Perlmutter (who merged his company, Toy Biz, with Marvel), director Shelly Greenhaus and investment bank Morgan Stanley received preferred stock that paid them quarterly dividends, payments that cut Marvel's earnings by an average of $16.3 million a year.
But in November, Perlmutter, Greenhaus and Morgan Stanley converted their preferred shares, which account for 85 percent of the total preferred share count, to common stock. As a result, the company's preferred dividend payments will be reduced to about $2.7 million a year. That $13.6 million saving flows right to the bottom line.
The company's newfound success has attracted the interest of Wall Street. A year ago, no analysts followed the stock. Now Routh and an analyst at Thomas Weisel cover it. Their consensus earnings estimate for 2003 is for 59 cents a share. So, at current levels, the stock trades at about 17 times 2003 forecasts, or less than half its expected growth rate of about 47 percent in EPS for the year.
Routh thinks the stock has more upside because there are more movies featuring Marvel characters in the works. The Spider-Man sequel, the "Amazing Spider-Man", will be released in 2004 (with a screenplay by Pulitzer Prize-winning novelist Michael Chabon, no less). Movies based on The Punisher and The Fantastic Four also are in development. Routh does not own shares of the stock and Natexis Bleichroeder has no investment banking relationship with Marvel.
Given the changes to the balance sheet and the fact that the company now is in a position to make money off the numerous films, cartoons and video games based on its characters, it looks like not even the likes of the Green Goblin, Magneto or Dr. Doom could sabotage Marvel's progress.