Ori Eyal did an internship at Aquamarine over the Christmas break. He is a student at the Chicago Graduate School of business and is an accomplished investor in his own right. He did a write up of Marvel Enterprises.
Ori Eyal – Marvel Enterprises Stock Analysis
Marvel Enterprises Stock Analysis
Date: 1/23/2005
Ticker: MVL
Stock price: $17.60
Market Cap: $1.85B
Enterprise Value: $1.83B (including options)
2004 P/E: 16.7
2005 P/E: 15.7
2006 P/E: 13.1
Recommendation: Strong Buy
Target price: $24 Ori Eyal
MBA – Class of 2006
The University of Chicago
Graduate School of Business
oeyal[at]chicagogsb.edu
312-363-8599
2002 (A) 2003 (A) Fy-2004 (E) 2005 (E) 2006 (E) 2007 (E) 2008 (E) 2009 (E) Note:
Main Films: Spider-man, Blade 2 X-men 2, Hulk, Daredevil Spider-man 2, Punisher, Blade 3 Fantastic 4, Elektra X-men 3, Iron Man, Punisher 2, Ghost Rider, Luke Cage, Deathlok Spider-man 3, Namor, Hulk 2, Wolverine
SALES:
Licensing – domestic $47.6 $106.2 $120.0 2004 numbers are my estimate
Licensing – international $10.2 $18.2 $25.0
Licensing – toys (TBW) $21.8 $64.8 $70.0 2004 numbers are my estimate
Total Licensing $79.6 $189.2 $215.0 $260.0 $312.0 $358.8 $394.7 $414.4
Publishing $64.4 $73.2 $85.2 $88.6 $92.2 $95.8 $99.7 $103.7 grows 4% annually
Toys $155.0 $85.2 $245.9 $51.4 $25.0 $140.0 $50.0 $50.0 Large jump after spider-man movie.
Total Sales $299.0 $347.6 $500.0 $400.0 $429.2 $594.6 $544.4 $568.1
GROSS PROFIT:
Licensing $79.6 $189.2 $215.0 $260.0 $312.0 $358.8 $394.7 $414.4
Publishing $32.2 $40.0 $44.8 $44.3 $46.1 $47.9 $49.8 $51.8
Toys $45.1 $39.0 $91.3 $18.0 $8.8 $49.0 $17.5 $17.5
Total Gross Profit $156.9 $268.1 $351.1 $322.3 $366.8 $455.7 $462.0 $483.7
OPERATING INCOME:
Licensing $69.3 $139.4 $160.9 $182.0 $228.8 $270.9 $303.2 $321.0
Publishing $19.6 $25.4 $34.5 $36.0 $37.0 $38.0 $39.0 $40.0
Toys $8.9 $21.7 $44.5 $8.0 $0.0 $25.0 $8.0 $8.0
Corporate Overhead ($17.3) ($19.4) ($21.9) ($23.0) ($24.1) ($25.3) ($26.6) ($27.9) Grows 5% annually
Operating income $80.5 $167.2 $218.0 $203.0 $241.7 $308.6 $323.6 $341.1
Interest expense ($42.0) ($18.7) ($18.3) $0.0 $0.0 $0.0 $0.0 $0.0
Income Tax ($11.9) $1.3 ($71.8) ($73.1) ($87.0) ($111.1) ($116.5) ($122.8) 36%
Minority interest (2) $0.0 $0.0 ($14.3) ($3.9) ($3.9) ($14.3) ($3.9) ($3.9) Large jump after spider-man movie.
Other expense ($4.0) $1.7 ($2.6) $0.0 $0.0 $0.0 $0.0 $0.0
Royalties expense $0.0 $0.0 $0.0 ($8.0) ($9.7) ($12.3) ($12.9) ($13.6) Royalties to Stan Lee
NET INCOME: (1) $22.6 $151.5 $111.0 $118.0 $141.1 $170.9 $190.3 $200.7
PV at 17% $100.9 $103.1 $106.7 $101.5 $91.6 Sum of PV = 503.8
Source: Marvel annual reports, Marvel press releases, Marvel guidance, and author’s estimates
Table Notes:
1) Net income before preferred dividends.
2) Spider-Man JV with Sony. Accounted for using the equity method until April 2004, and then started consolidating.
About Marvel
Marvel Enterprises develops, and licenses its super-hero character library which contain over 5000 characters. It’s 3 business segments are licensing, publishing, and toys. The licensing segment licenses the use of Marvels characters in films, television shows, video games, toys, advertising, and merchandising operations. The publishing segment publishes comic books and also serves as the “R&D” arm of Marvel. The toys segment manufactures and sells Spider-Man toys.
The economics of Marvels business are fantastic. Each of its 3 business segments is profitable, has very high margins, and requires little capital. Marvels CAPEX requirements are almost zero. By selling licenses for use of its characters to others, Marvel does not risk any of its own capital, gets paid substantial fees, and has its character properties developed at someone else’s expense.
Marvel has been recovering from bankruptcy in the last few years after it was grossly mismanaged in the 1990’s. Today marvel is completely debt free, has $135M of cash on its balance sheet, and is generating strong earnings and free cash flow. Since CAPEX is almost zero, Marvel will likely use its free cash flow to buy back shares (it has already started a $100M share re-purchase).
Over the past few years, Marvel has licensed characters for blockbuster film franchises including Spider-Man and X-Men. Marvels overall success depends heavily on the success of its films as these are the main drivers for all of its operations. A successful film not only provides direct revenue, but increases marvels indirect licensing, publishing, and merchandising profits. The table above shows film that have been launched and films that will be launched in the next few years. Of these, Fantastic Four, Spider-Man 3, X-Men 3, Namor, and Wolverine all have “blockbuster” potential.
Marvels Growth Prospects
Marvels main business driver in the future will clearly be licensing. Some analysts have argued that Marvels future growth is limited since audiences will not “accept” more than 4-6 super-hero films every year and since competition in this segment is increasing. This argument overlooks 3 key points.
First, Marvel enjoys revenues from films over several years as the films are re-launched in CD format and as licensing and merchandising revenues continue to flow in. Every Marvel film is a multi-year revenue stream. Even if Marvel cannot increase the number of films it licenses every year, its revenue and profits will still grow as the number of revenue streams increases.
Second, Marvel has only started its international expansion. Over the last few years, revenues from international licensing were a small fraction of US licensing revenues. There is every reason to believe that Marvel’s characters are equally appealing to international audiences. At the start of 2004, Marvels licensing group began expanding its overseas businesses through newly established offices located in London and Tokyo.
Third, Marvel has not even started developing movies based on Captain America and Thor. Based on the popularity of these characters, there is a very high probability that these moves will be block busters in the future. Therefore, even if audiences temporarily tire of Spider-Man and X-men films, Marvel can fall back on its very strong “bench” of “reserve” characters.
Competition
Marvels characters “compete” with characters from DC comics and other (much smaller) comic publishing franchises. The 3 top characters in the DC comic’s franchise (superman, batman, cat-women) which is owned by AOL-Time Warner have been grossly mismanaged. Many fans consider the last few movies based on these characters to be “insultingly bad”.
In the authors opinion (which is shared by many others), Marvels characters are much more interesting than those of DC comic’s since they have a history and posses character flaws and weaknesses.
Management team
Marvel is led by Isaac Perlmutter who became CEO in October, 2004. Mr. Perlmutter, who is Marvels largest shareholder, has been actively involved in the management of the Company since acquiring its predecessor in 1990. He has served as a director of the Company since 1993, served as Chairman of the Board from 1993 to 1995, and was named Vice Chairman of the Board in 2001.
Valuation
Marvel will likely have net income of about $200M in 2009 (see model). Assuming a conservative P/E of 15 at that time, we get a market cap of $3.0B in 5 years. Since CAPEX is almost zero, I assume net income between 2005 and 2009 will be returned to shareholders through share repurchases. Plugging these numbers with the current stock price in a DCF shows an annual compounded return of 17.5% until 2009.
DCF Calculation Explanation:
Net Income in 2009 $200.7M From model above
Multiple 15 Conservative P/E multiple
M-cap in 2009 $3,011M = $200.7 X 15
Discount Rate 17% Discount rate for DCF calculation
Present value of market-cap in 2009 $1373.4M = $3011 discounted 5 years back at 17%
Present value of cash flows between 2005 and 2009 $503.8M From model above
DCF value in 2005 $1,877M = $1373.4 + $503.8
EV Calculation
Shares outstanding 106M
Stock options outstanding 10M 10M stock options outstanding at weighted average conversion price of $7.5
Stock price $17.6
Fully diluted market-cap $1967M = ((106M + 10M) * $17.6) – (10M * $7.5)
Net cash on balance sheet $135M
Enterprise value $1832M = $1967M – $135M
As can be seem from this table, an EV calculation and a DCF calculation at 17% give us approximately the same value, so investing in MVL today should yield an annualized return on 17% until 2009.
The bear case (possible risks)
There are 3 main risks for Marvel:
1) Audiences get tired of super-hero based films.
2) Marvel’s movies fail in the box-office.
3) Competition increases dramatically.
A brief response to these arguments is:
1) While it is not possible to predict audience tastes in the future, Marvel’s characters have been very compelling to date. Marvel currently has 2 “tent-pole” franchises (Spider-man and X-men) and will probably develop at least one more (Fantastic four, Namor, Captain America, Thor, or Wolverine). Marvel can launch a Tent-Pole film once every year while alternating between its 3 or 4 main franchises. This strategy will increase Marvels chance of having at least one block-buster every year while not overusing any one franchise.
2) Marvel works closely with its studio licensees to make sure that they produce quality films. Unlike other movie franchises that often rely only on special effects, Marvel makes sure that all of its movies have an interesting story line.
3) The only serious competitor in the “super-hero” segment is DC-comics. This competitor was discussed above.
