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Marvel Entertainment, Inc.


Neutral Review

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Research Report

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.

Steve does not own MVL.

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