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Simply Marvel-ous
This year should be a lousy one for Marvel Entertainment but watch out in 2007: here comes Spider-Man 3!
By Paul R. La Monica, CNNMoney senior writer

NEW YORK (CNNMoney.com) – Comic book fans know that the hero doesn't always save the day. Sometimes, the evil villain wins.

And for shareholders of comic book publisher Marvel Entertainment, these past few months have been like those dark times when their favorite character temporary loses his or her superpowers.

The first two Spider-Man movies have helped lift sales and profits for Marvel and Wall Street is hoping for more of the same when
The first two Spider-Man movies have helped lift sales and profits for Marvel and Wall Street is hoping for more of the same when "Spider-Man 3" comes out in 2007.
Marvel is taking a big risk by prodcuing its own movies in-house. But the move may lead to more predictable earnings and revenue for the company.
Marvel is taking a big risk by prodcuing its own movies in-house. But the move may lead to more predictable earnings and revenue for the company.
Comic book carnage: Shares of Marvel Entertainment nosedived after an earnings warning in November.
Comic book carnage: Shares of Marvel Entertainment nosedived after an earnings warning in November.
INVESTOR RESEARCH CENTER INVESTOR RESEARCH CENTER upgrades & downgrades earnings & warnings public offerings INVESTOR RESEARCH CENTER INVESTOR RESEARCH CENTER

In November, Marvel shocked Wall Street with sales and earnings guidance for 2006 that was substantially below consensus estimates.

Shares of Marvel (Research) plunged 22 percent on the news. If Comic Book Guy from "The Simpsons" were a shareholder of the company, he would undoubtedly declare that it was the Worst...Earnings Announcement...Ever.

Not a heroic 2006...

So with the company set to report its fourth-quarter results for 2005 on Thursday, should investors turn the page on Marvel or is the company set to do its best Jean Grey imitation? (For those of you not in the know, she's the character from Marvel's X-Men series that dies and returns as the Phoenix.)

The fourth quarter numbers should actually be pretty healthy. Analysts are expecting sales to jump 12 percent and profits to surge 46 percent.

But nobody really cares about these results. Investors are worried about how lousy of a year 2006 is shaping up to be. Revenues are expected to drop 24 percent and earnings are expected to plunge 51 percent.

However, as the company continues to generate more and more of its revenue from lucrative licensing deals and less from its low margin publishing and toy businesses, the company seems primed to bounce back sharply in 2007.

Marvel has transformed itself during the past few years from a stodgy publisher of comic books into a legitimate entertainment company that has realized the value of its vast library of popular characters, such as Spider-Man, Captain America and the X-Men.

During the first nine months of 2005, Marvel generated more than half of its sales and 70 percent of its operating profits from licensing.

The company has struck deals with movie studios, video game software firms and other consumer oriented companies to receive a cut of revenue and profits from the sale of products using Marvel characters. Movies in particular have been a big factor behind Marvel's growth as the company as shared in the box office success of hits like the first two Spider-Man films.

This year, however, Marvel has only one movie based on its characters due out in theaters, "X-Men: The Last Stand," the third movie in that series. Fox, the movie studio owned by News Corp. (Research), is making this movie and was the producer for the first two, which grossed more than $370 million in the U.S. according to movie tracking service Box Office Mojo.

...but Spidey saves the day

But next year should be a lot better for the company.

A movie based on the company's Ghost Rider character is due out in February 2007. "Spider-Man 3" is tentatively set to be released in May and "Fantastic Four 2" should hit theaters in July. Sony (Research) is producing the Ghost Rider and Spider-Man films while Fox is the studio behind the Fantastic Four sequel.

Analysts are currently predicting that Marvel will report revenue of $487.8 million in 2007, an increase of 67 percent from estimated 2006 sales and a 26 percent improvement over 2005's projected results.

Profits are expected to rebound by nearly 140 percent next year. What's more, consensus estimates of $1.21 a share are a 13 percent increase from expected earnings per share for 2005.

For this reason, Anthony Gikas, an analyst with Piper Jaffray, said that he expects Marvel's stock to rally later this year on anticipation of a strong 2007. What's more, beginning in 2007, a new five-year licensing deal with toy maker Hasbro (Research) will kick in. Marvel said it will receive a guaranteed $205 million in royalty and service fee payments over the life of the deal from Hasbro, which will produce action figures, games and puzzles based on Marvel characters, and that $70 million of this is payable upon release of "Spider-Man 3."

"I do think the stock will get a lift in the back half of this year," Gikas said. "The vast majority of bad news was in the stock and the worst is behind them."

But investors might also be worried by a big gamble that Marvel is going to take in the next few years.

Last September, the company announced that it had borrowed $525 million to finance the in-house production of up to 10 movies based on characters such as Captain America, Nick Fury and the Avengers. Paramount, a subsidiary of Viacom, will distribute the movies and the first movie is tentatively scheduled for 2008.

The upside is obvious. If these movies are hits, Marvel reaps almost of all the gains instead of having to negotiate for a cut from the larger movie studios. But if these movies flop, they will have a bigger impact on Marvel's revenue and earnings than a failure of a film that Marvel is merely partnering with a studio on.

This risk might already be priced in the stock though. Shares trade at about 13 times 2007 earnings estimates.

And Gikas thinks that Marvel will benefit from making its own movies since it will make them less reliant on other Hollywood studios' schedules. He argues that Marvel may be in a better position to produce a film or two a year, which should lead to more predictable earnings and revenue streams.

"The issue is the sustainability of earnings," Gikas said. "What this does is give Marvel the flexibility to set their own schedule so they are not the mercy of the studios."

So yeah, Marvel's stock may be acting like mild-mannered Peter Parker right now. But there's a good chance that before long, shares will once again be scaling new heights just like Spidey.

For more about Marvel's heroic turanround, click here.

For a look at the profitable world of anime, click here.

Gikas does not own shares of Marvel and his firm has no investment banking relationship with the company. Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.