Marvel Steels Itself for 'Iron Man' Open

This opening weekend for this film, the first financed totally by Marvel, is likely to prove a catalyst for the stock.
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Marvel Entertainment (MVL) has a potential blockbuster on its hands with this weekend's release of Iron Man.

While most Wall Street analysts are projecting around a $50 million maximum opening weekend for the film, the buzz around Hollywood is that the numbers could come in higher than $70 million. If that happens, there could be some nice near-term upside for the stock.

Investors buying Marvel today have two upcoming catalysts occurring on the same day, May 5.

Marvel Needs 'Iron Man' to Do Some Heavy Lifting

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That is when the opening weekend numbers for

Iron Man

will be released, and when the company will report earnings. Marvel has beaten analyst estimates for seven of its last eight quarters -- not only beating the mean estimate but the high estimate as well, according to Thomson Financial.

A decent amount of skepticism is hanging around Marvel's stock today. Some analysts and investors are wondering whether the company's growth has peaked, given that the

Spider-Man

and

X-Men

characters have already been milked for three movies apiece.

A strong

Iron Man

showing would help quiet these critics. The movie stars Robert Downey Jr. as the title superhero, along with Gwyneth Paltrow; it is directed by Jon Favreau (

Elf

,

Swingers

).

A strong showing also could provide a huge boost to Marvel's earnings. This is the first of 10 movies that Marvel will be financing itself. This creates more risk but also allows for very large profits if the films prove successful. In the past, the company licensed out its characters to movie studios (e.g., to

Sony

(SNE) - Get Report

with

Spider-Man

) and lost out on much of the upside. (Sequels to already-released Marvel films, such as

Spider-Man

and

X-Men

, will continue to be licensed to outside studios in the future.)

Banking on a Big Open

Influential

Los Angeles Times

entertainment writer John Horn recently wrote that tracking numbers for

Iron Man

suggest it could be one of the summer's top hits. He cited rival studio executive sources who have seen the tracking numbers -- which are based on consumer surveys that gauge movie interest from people who have seen the film's trailer. "Don't be surprised if it takes in as much as $70 million on opening weekend," Horn wrote.

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Hollywood Stock Exchange, which acts as a virtual stock market that tracks expectations for films, shows

Iron Man

is expected to gross $214 million, which suggests a $70 million opening.

One issue facing the stock: Even if

Iron Man

is a hit, many are expecting another release,

Incredible Hulk

, to have problems. The issue is that the film is being released just five years after a separate Ang-Lee-directed version of the film disappointed (just $132 million of U.S. box).

All this makes Marvel a bit of an oddball stock. Last year, about 25% of Marvel's revenue came from its slow-growth publishing business, which controls 50% of the North American comic market (followed by DC Comics at 35%). This is a great business, but it lacks the capacity to get investors thrilled about the stock.

The rest of Marvel's profits come from its high-margin licensing business -- which collects royalties on sales of toys, video games and consumer goods made by the likes of

Hasbro

(HAS) - Get Report

, Sega and

Johnson & Johnson

(JNJ) - Get Report

. This is a very strong business, but critics of the stock say Marvel's future success here is dependent on turning the

Iron Man

and

Hulk

characters into the next stars that the

X-Men

and

Spider-Man

have become.

The Wall Street View

Using Wall Street consensus earnings estimates for the next five years, Marvel's stock (at roughly $29) looks cheap at just 17 times forward EPS, given the 18% annual EPS growth analysts expect over the next five years. Applying a discounted cash flow model to the consensus estimates, I believe the stock is worth $34.

Another $1 or so of upside may be offered if

Iron Man

comes in at more than $70 million in its opening weekend.

The downside risk to the story, of course, is that

Iron Man

,

Hulk

and the whole other future slate of movies coming -- e.g.

Thor

,

Captain America

and

Nick Fury

-- end up being busts.

Spider-Man 4

is likely to come out in either 2009 or 2010, and will surely provide a nice bit of growth (although Marvel is once again not capturing film profits from this, only license fees, as the movie will be financed through the Sony joint venture).

Investors have already been getting more excited about Marvel's stock of late, but there remains some skepticism, says Drew Crum, an analyst with Stifel Nicolaus who rates the stock a buy.

"The reward-to-risk ratio becomes less compelling ahead of the film if the stock is above $30," he says. "If the film falters on opening weekend, the stock is probably going to be weak."

Crum estimates that $150 million in U.S. box office receipts translates into about $65 million in gross film profits, excluding toy and merchandising sales associated with the film, which could add another $10 million and $20 million of profits. Every additional $25 million of U.S. box office translates into an additional $50 million of profit over the film's life, or about $1 to $2 in extra value per share, Crum says.

The film production business is so compelling because much of a film's costs are fixed, so higher box office revenue creates serious operating leverage.

One other worry circulating among analysts is how

Take-Two Interactive's

(TTWO) - Get Report

Grand Theft Auto IV

video game may impact

Iron Man's

box office receipts. The game is being released this week, ahead of the opening weekend for

Iron Man

.

"This is an interesting competitive entertainment choice for an audience," says Janco Partners analyst Mike Hickey, who rates Marvel market perform. "It appears

GTA

will likely capture at least a portion of

Iron Man's

audience."

Paul Dergarabedian, president of Media by Numbers, a box office tracking firm, disagrees.

"

Iron Man

has strong appeal to gamers and techies," who are big pieces of the target audience for the film, he says. "They will have time for both that weekend. They will be playing

GTA 4

and going to see

Iron Man

."

He expects the film to open somewhere in the middle of the $65 million to $100 million opening weekend range that he is hearing.

One other positive for

Iron Man

: The film is opening during the same time of year as last year's record-breaking opening weekend for

Spider-Man 3

, which took in $150 million in its first weekend.

Bottom line

: If you believe in

Iron Man

, buy the stock. If not, wait on the sidelines.