Marvel May Flatten Rivals Disney, Time Warner

After the company went standalone, it has been able to draw on its massive comic-character fan base.
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Marvel Entertainment Group

(MVL)

, which released the movies "Iron Man" and "The Incredible Hulk," is poised to outperform larger rivals

Time Warner

(TWX)

,

News Corp.

(NWS) - Get Report

,

DreamWorks

(DWA)

and

Disney

(DIS) - Get Report

.

MVL has risen 5.8% this year and is rated "buy" by TheStreet.com Ratings. Its aforementioned competitors each carry a "hold" rating.

Marvel's role in the film industry has changed significantly over the past year. Previous franchises such as "X-Men" and "Spider Man" were tied up with cooperating film studios Twentieth Century Fox and Sony Pictures, respectively. Consequently, MVL was sacrificing box-office, DVD and merchandise revenue. But since the company elected to go standalone, that is no longer the case.

Overwhelming data indicate that Marvel's intellectual property, its body of some 5,000-plus comic characters, is a goldmine of film revenue. The company has a lock on the lucrative superhero genre and enjoys a preexisting and loyal fan base. However, its stock is costly due to recent accolades. The shares are fairly valued based on price-to-earnings, but are relatively expensive based on price-to-sales, price-to-cash-flow and price-to-book ratios.

Third-quarter net sales jumped 47.6% to $182.5 million from the same period a year earlier, and earnings per share increased 42.2%. MVL posted a gross margin of 91.3% and operating margin of 47.2% for the quarter. The company has a reasonable amount of debt as reflected by a debt-to-capital ratio of 0.35, but somewhat weak liquidity, as reflected by a quick ratio of 0.48. MVL does not pay dividends.

Creating a superhero movie requires a capital-intensive production period. As a result, Marvel faces significant risk from a box-office bomb. However, the company has a unique method of financing, a $525 million non-recourse credit facility from Merrill Lynch. If a movie significantly underperforms, Marvel loses the right to produce follow-ups. The company posted production and distribution rights for 10 of its characters as collateral for the loan. Vertical integration should mitigate some risk. Marvel Publishing, which sells comic books, accounted for $34 million, or 18.6%, of third-quarter net sales and achieved an operating margin of about 37%. The publishing arm is able to identify which characters make the most successful film franchises based on the existing fan base.

Third-quarter licensing revenue declined to $58.1 million, representing 31.8% of net sales. Film production revenue, including $60 million of revenue recognized from the box-office and DVD release of "Iron Man," advanced to $90.2 million. Marvel Studios does not have a new movie coming out until "Iron Man 2" in 2010, but the head of the film studio, David Maisel, purchased 100,000 MVL shares for $2.4 million on Nov. 20. This purchase bodes well for future performance. The company has 2009 upside potential on "X-Men Origins: Wolverine," which is being released by Twentieth Century Fox in May.

MVL has a market capitalization of $2.4 billion, placing it in the mid-cap category. The stock is liquid, with average daily trading volume of about 1 million shares. A beta of 0.81 indicates relatively strong market correlation. However, the film industry, and in particular fantasy movies, tend to succeed during recessionary periods due to an escapism draw. Nevertheless, Marvel issued cautious guidance when it released third-quarter earnings on Nov. 4 and included a 10% to 15% recessionary cushion in its forward projections.

The stock is currently trading around $28, in the middle of the 52-week range of $23.28 to $38.50. MVL stock jumped about 40% over a 30-day period before and after the May 2008 "Iron Man" premier. "Iron Man 2" could match or outperform its prequel. However, many factors, including unpredictable reviews, affect a movie's financial performance. Consider macroeconomic and idiosyncratic risk before investing in MVL.