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Last Updated: Jul 4, 2008
Business Summary
Character-based entertainment company with over 5,000 character properties such as Spider-Man, Incredible Hulk, Fantastic Four, X-Men, Blade, Daredevil, Avengers, etc. Four business segments: Licensing, Publishing, Toys, and Film Production. The Licensing segment (54% of revenues, 64% of earnings) earns revenues from selling rights to movies, television production companies, video game publishers, and merchandise manufacturers to use it's character properties. The Publishing segment (28% of revenues, 24% of earnings) produces, markets, and sells comic books. The Toys segment (19% of revenues, 29% of earnings) collects royalties and service fees from Hasbro. The new Films segment (no revenues yet, operating losses) will produce films featuring Marvel's characters.
Growth Strategy
Primary strategy is to increase exposure to it's character properties by licensing them for movie and television adaptations. This creates opportunities to profit from toy and other licensed property sales, in addition to a cut of box office and home video receipts. The company has moved into the movie producing business, from a previous strategy of straight licensing. In this strategy, more of movie profits to flow to Marvel... but also places the risk of movie financing on the company. The first two self produced movies, Iron Man and Incredible Hulk, are due in 2008, and the company plans a release schedule of 2 films per year.
Competitive Position
Marvel has nearly 70 years of character history and awareness built up around it's properties. This is an extremely valuable intangible asset that can be levered in almost limitless ways to provide revenues, and costs practically nothing to maintain. Everyone from 5 year old boys to 70 year old women know of Spider-Man, Incredible Hulk, X-Men, Captain America, etc. This is a big competitive advantage that cannot be easily reproduced by a competitor.
Risks
MagicDiligence would classify Marvel as a high risk stock. The new Film division in particular is completely new and untested. The large up-front costs of producing feature films can put Marvel in difficult financial condition if a film fails miserably. Additionally, all of Marvel's revenue is consumer discretionary. When times get tough, movies, comic books, and toys are easy to cut out of a family budget. Marvel also already carries a fair amount of film facility debt, putting even more pressure on the Films division to deliver.
Management
Management is good. Issac Perlmutter has been CEO since 2005, with the company since before it's pre-bankruptcy days in 1993. He owns over 34% of the common shares - a huge stake that aligns his interests with shareholders'. Salaries are reasonable and the company grants no stock options
Financial Health
The company holds a $525 million dollar credit facility with which to finance their film production, from which about $250 million is drawn. Interest coverage is a more than acceptable 20 times. Historical free cash flow margin is over 35%, although 2007 was cash flow negative due to ramp up of the film studio. Free cash flow margin should return to mid 20-s levels, assuming feature films are moderately successful.
MagicDiligence Opinion
Marvel runs an attractive business. It's primary bankable assets are intellectual, and hard to duplicate with their wide recognition and history. The decision to produce films seems poorly timed, as their most recognizable characters already have had their big payday at the box office (Spider-Man, X-Men, and Fantastic Four), and several second tier properties as well (Daredevil, Blade, Ghost Rider). The only top tier character they plan to produce is the Hulk, and he's already had one flop. Looking over the list, the only well known character is Captain America. The price looks cheap now, but that's on the heels of Spider-Man 3, and the web slinger is on the shelf for a while. Marvel is probably appropriately valued given what's known right now.
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Marvel Entertainment, Inc.
MVL
Media
Competitors
Disney (DIS)
Dreamworks Animation (DWA)
Time Warner (TWX)
Current Price/Change
$24.71 -0.17 (-0.68%)
Market Capitalization is calculated like:
Market Cap = Share Price * Number of Shares
Market capitalization is the price you would have to pay to acquire the entire company on the open market (at current prices). MagicDiligence categorizes companies into 3 size classes:
Large Cap: Over 10 billion market cap.
Mid Cap: Between 2 and 10 billion market cap.
Small Cap: Under 2 billion market cap.
Market Cap (Millions)1,938 (Small Cap)
The formula for Earnings Yield is:
Earnings Yield = EBIT / Enterprise Value
Earnings Yield tells you how much the company has produced in income relative to the price you paid for it. This can be compared to the yield on a traditional fixed income investment such as a bond, CD, or money market account. Very high earnings yields indicate a cheaply priced stock, relative to trailing earnings. Earnings Yield is one of the two statistics used by the Magic Formula screening strategy.
Earnings Yield12.86%
Free Cash Yield is calculated like:
Free Cash Yield = Free Cash Flow / Enterprise Value
Free Cash Yield is a more telling version of Earnings Yield. While a company can easily manipulate earnings, the cash it collects and spends is very discrete. Since the value of a business is directly related to the cash it produces for owners, Free Cash Yield is a better valuation statistic than Earnings Yield. The concept is the same, however.
Free Cash Yield-0.59%
EV/S stands for Enterprise Value over Sales. This is calculated like:
EV/S = Enterprise Value / Total Revenues
Several studies have confirmed that stocks with low EV/S ratios, particularly under 1.0, have historically been excellent investments. Although the Magic Formula strategy is based on Earnings Yield, combining successful strategies is one way to improve results, and that is why EV/S is listed here.
EV/S4.35
Return on Tangible Capital is calculated like:
ROTC = EBIT / Tangible Invested Capital
where:
Tangible Invested Capital = Total Assets - Goodwill - Intangibles - Excess Cash - Non-Debt Current Liabilities
Return on Tangible Capital is the 2nd statistic used by the Magic Formula screen. Its purpose is to identify companies that efficiently invest money to generate the highest returns. Exceptional firms can consistently generate 30% or higher returns on capital. MagicDiligence lists both one-year and five-year averages for this statistic to help weed out companies that can consistently generate high returns from those that benefit temporarily from a fad product or high commodity prices.
Return on Tangible Capital395.3% (ttm)
NM (5yr avg)
Free Cash Flow Margin calculation:
FCF Margin = Free Cash Flow / Revenues
The percentage of sales that is available as free cash flow. Free cash flow can be reinvested back into the business, paid out to shareholders, used to pay off debt, or saved for a rainy day. Higher values indicate more profitable firms. MagicDiligence likes to see 5% or higher.
Free Cash Flow Margin-2.7% (ttm)
30.2% (5yr avg)
Excess cash is calculated like:
Excess Cash = Cash - (Current Liabilities - Current Assets + Cash)
Excess Cash refers to cash on the balance sheet that is not required to cover current liabilities, should the need arise. In theory, if the company had to be liquidated, this is the cash that would be left over for shareholders. It is useful in approximating what cash is invested in the business and what is extra.
Excess Cash72M
Debt is simply the total amount of debt, short-term and long-term, listed by the company in the most recent quarterly or annual report.
Debt247M
Coverage Ratio is calculated like:
Coverage Ratio = EBIT / Net Interest Expense
If Net Interest Expense is 0 or higher, Coverage Ratio is listed as 0. This statistic is a financial health measure telling you how many times the company can cover debt interest obligations with operating earnings. Generally a value of 7.0 or higher is comfortable, but a Coverage Ratio of 0 is ideal.
Coverage Ratio19.758
Debt to Equity ratio is:
Debt to Equity = Total Debt / Total Equity
This is another financial health statistic. A company finances it's business through two means: bank debt and shareholder equity. If a company is liquidated, bank debt is usually paid off before shareholders see anything. A high debt-to-equity ratio (over 0.80) can be a sign of too much debt, although this varies by business. An ideal value is 0.
Debt to Equity Ratio1.360
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Mar 13, 2008