Marvel’s Super Stock
Hey, it’s quarterly earnings time! Time Warner Cable isn’t as interesting to cover, stuck at about $26.30 a share. Partly that’s because it’s so huge, and there are a ton of multimedia things that override DC Comics. Still, if there are enough requests, I can take a stab at it some time. The more exciting story right now is Marvel.
The most recent quarter ended in June, and they didn’t make as much profit. This is actually something to be expected in a media company. Pixar and Disney and others make a ton of money when their movies come out, and have dry spells in between. A company’s stock might see-saw up and down depending on what’s in the immediate pipeline. In my previous article covering the stock, I didn’t hide the fact that I thought Marvel was a good buy. Well, in the interests of disclosure, I should note that I went out and bought 90 shares. The ride up has been fun, and now I have to figure out if I should sell now, or hope for more. If the stock goes lower for the short term, is that reason enough to get out? Or am I more confident in the long-term potential of the stock?
Now for the numbers: $116 million in sales, income of $29 million after the dust settles. Last year, the numbers were $157 million and $46.7 million, respectively. Any investor paying attention knew that the profit would be lower this quarter, with the Spider-Man movie tie-in licensing products fading away, and no movies coming out from Marvel’s studio this year. One of the highlights was DVD sales, and a little pay TV benefit due to Iron Man (Pay TV revenue from the Hulk reboot won't hit accounts receivable until the second half of this year). The report says to expect a $5 million "negative impact" for the year from its digital media initiatives. Part of that is the work involved in the Spider-Woman digital motion comic. (You know, the one that was supposed to come out in April, but will now be out on August 19?)
Important caveat: I make it a point to do my research, so I'm not the place to go to get the day's news. The quarterly report came out almost a week ago. I came home from my day job, found the actual report, read it, and then went to see what had already been mentioned for the past few days, to see what relevant value I could add to the conversation. Almost every article had a mistake of some sort, so I will attempt to correct the most egregious errors. These are the sort of comments that some people might shrug off as unimportant, but when we're talking about investing real money, sometimes to the tune of millions of dollars, it helps to actually know what you're talking about.
The worst offender is Variety. Variety really should not try to spice up their reporting when the news comes out. Marc Graser claims that "Spider-Man is so popular for Marvel that the company breaks out licensing revenue for the character..." Um, no. Spider-Man is on a separate line because Marvel has a Joint Venture with Sony. It's called the Spider-Man Merchandising L.P., and is referenced in the earnings report as "Spider-Man JV." Marvel gets a nice little advantage from reporting income that comes from Sony via the Spidey movies and licensing, but Marvel is not responsible for the taxes associated with Sony's minority share of the JV income. That can make Marvel's effective tax rate lower, and under an agreement with Sony that settled litigation, they restructured the JV so they could account for it this way. So no, Spider-Man does not get a separate line because of his popularity, but due to legendary legal disputes and tax reasons.
Jake Lynch from TheStreet.com had nice things to say about the company, even if his wording was a little off. Contrary to his statement, Marvel did not become “a standalone film studio in 2008.” More precisely, they opened their own movie studio as part of their overall strategy to capitalize on their character library. They have not stopped publishing comics or making licensing deals, so they have not “become” something new and stopped any of the old stuff (except for the toy business, which they finally got out of completely). The most important point he makes is that the price-to-earnings ratio trades at 15:1, meaning each share is currently worth about 15 times what each share earned for the last year. If that sounds high, it’s not. And Mr. Lynch compares it with other companies in the entertainment industry, and says that’s at “a 42 per cent discount to the industry.” That’s a good deal. From what Investor’s Business daily says all the time, a high P/E ratio may hint at a stock about to break into even higher territory, which makes sense if you think about it: would you expect to see a rising ratio if the company looked like it was about to get into trouble?
Lynch makes one more comment that is not 100% accurate: he claims the company holds zero debt; but they do have a financing deal for their movies. Accounting tricks on the balance sheet aside, they have borrowed against a line of credit to make the movies, and they have been paying it back per the terms of the agreement. For this particular earnings statement, they paid back the debt early and financed the next movie using profits from the Iron Man and Hulk movies, so for this exact, extremely temporary moment in time, they are technically debt-free. However, they will in all likelihood be tapping into that line of credit for future movies. So for those who want the full story, they do have a line of credit, and it’s worth reading the terms to see what’s at stake. The overall company’s finances are doing well, but for investors looking to buy stock in the company, it would be a very important point to become educated on the terms of the film facility, the requirements for borrowing from it, and the consequences if everything doesn't go right.
The interesting thing is that the company beat expectations again. Last time I wrote about this, the company had beaten expectations, which normally means the stock will rise as people are pleasantly surprised. However, the stock dipped temporarily. It’s doing the same thing now. Analysts called for Marvel to make a certain mount of earnings and profit, and it did double. That’s huge! Marvel also raised their own earnings predictions for the future, but the last couple days of trading has seen the stock drop. Part of this is because some investors have decided to cash in their profits and move on to greener pastures, making their money continue to work harder for them. Others think that it doesn’t get any better than the quick jump of the earnings report that put them at an all-time high of $41.74 for a brief moment. They may dive back in later, but they expect a consolidation.
I expect a consolidation too, actually. My amateur attempts at technical chart reading call for a little drop-off, but they should keep marching higher. Michael Pachter amused me in the Reuters article, claiming “There's nothing in there that's really a shock." If there was no shock, then how did they beat analysts’ estimates?!? "Everybody knows the company has room to beat numbers and they're proving that each quarter,” he continues. Excuse me, but if the analysts knew they would beat the existing numbers, they would have put out higher numbers. That’s what analysts do: if they think the company is underestimating its own potential, they come out with their own estimate. They’ve done it to Google before, so why wouldn’t they have done it here? The quotes make no sense; they are only there so a quick report can get a quote from an “industry” person. They are not good statements to make.
The gold in the Reuters article is this: “Marvel beat profit estimates for the eighth straight quarter.” That’s music to an investor’s ears. Solid earnings are good, and beating earning estimates are better. The only thing to make a person wary is that the earnings can’t go straight up each quarter in a solid line. We have to wait for the revenue stream from each movie to be received, which makes for irregular earnings.
It looks from company statements as if they haven’t figured out what to do about deep discount rentals like Redbox yet, and are waiting to see others take the lead. This will be of great interest to Marvel, since their DVD sales were very strong, and will be responsible for some great profits in the future as they build up a movie library. The bad news for comic fans is that the publishing market went down a tiny bit, mostly blamed on the hit to advertising in the current economic climate. No mention of whether their recent price increase from $3.99 to $4.99 per issue for a lot of their titles has played a factor in any of this.
For those that want to read the actual transcript for their earning report, check it out here. There are some bad links on some other sites that shall remain nameless, so if you tried to get to it before with other sites, the link may not have worked. My final word is that the real world may force me to cash in my shares, but if I can hold out, I think the stock is a long-term keeper for these reasons:
- upcoming schedule of movies through 2012
- strong DVD sales
- record of beating estimates
- pay TV revenue from the Hulk movie later in 2009
- comparatively low PE ratio
I will issue updates as time passes so we can get snapshots into the stock's development, and see if it progresses as well as I expect (there are those pesky expectations again!).
Tpull is Travis Pullen. He started reading comics at 5 years old, and he can't seem to stop.