Advanced Dark said:
Here comes the Spider-Man
Comic book company Marvel should have a banner year in 2007, but some worry about its ambitious plans to start making its own movies.
By Paul R. La Monica, CNNMoney.com senior writer
August 4 2006: 12:57 PM EDT
NEW YORK (CNNMoney.com) -- When comic book company Marvel Entertainment reports its second-quarter results Monday, it's safe to say that few will care about how Marvel actually did in the second quarter.
Everyone who follows the company closely knows that this is not going to be a good quarter (or year, for that matter) for Marvel. That's because Marvel generates the bulk of its sales and profits from licensing the rights to its characters for use in movies, television shows, video games and other merchandise.
Marvel makes the most of its profits from licensing the rights to its large stable of comic book characters such as the X-Men, the Incredible Hulk and the Fantastic Four to movie studios and video game publishers.
Wall Street has high hopes for "Spider-Man 3", which comes out in May 2007. In addition to licensing fees, Marvel has received a small cut of the box office for the first two Spidey films from the movies' producer, Sony.
A rocky ride: Shares of Marvel surged earlier this year but have lost some of their luster lately due to concerns about management departures and plans to finance its own movies.
And Marvel (Charts) has only one major movie tied to one of its comic book franchises this year, "X-Men: The Last Stand." Granted, "X-Men", released in May, has been a huge blockbuster for Marvel and News Corp's Fox, the studio that released the film.
Still, it won't be enough to substantially lift Marvel's results this year. Wall Street expects the company to report a revenue and profit decline for the second quarter and for the whole year.
But 2007 is expected to be a different story. At least three movies based on Marvel's characters are due out next year, most notably "Spider-Man 3," which will be released next May.
Yeah, it may seem too early for Wall Street to get excited about "Spider-Man 3" (although have you seen how cool Venom looks in the trailer?) but now actually is the time for investors to start paying attention to how much of a lift this movie will give to Marvel's sales and profits.
"People are looking at the story for next year with 'Spider-Man 3' coming out. How could you not? That's where the growth is going to be," said Arvind Bhatia director of research with Sterne, Agee & Leach.
2007: Superheroic sales and profits?
Let's rewind to this time three years ago. When Marvel reported its second quarter results back in August 2003, the release of "Spider-Man 2" was still nine months away.
But partly due to expectations about how well that movie would do, Marvel issued sales and profit guidance for all of 2004 that was higher than what Wall Street was expecting and Marvel's stock surged more than 15 percent on the news.
So will history repeat itself when Marvel reports its second quarter results Monday? Could the company significantly raise its 2007 guidance thanks to some optimistic Spidey forecasts?
Robert Routh, an analyst with Jefferies & Co., said he's not sure if Marvel is ready to issue 2007 guidance just yet. But even if it doesn't, he said it's clear that with "Spider-Man 3" coming out next year as well as a "Fantastic Four" sequel and a movie based on Marvel's "Ghost Rider" character, next year could be the company's most successful in its history.
Analysts currently expect Marvel to report sales of $460.9 million in 2007 and earnings per share of $1.18.
So if Routh is right about 2007 potentially being Marvel's best ever, then Wall Street estimates would appear to be way too low, particularly on the sales side. In 2004, Marvel reported revenue of $513.5 million and a profit of $1.04 per share. (Marvel's earnings peak was not 2004 though. The company posted earnings of $1.11 a share in 2005 even though sales fell.)
Despite this, many on Wall Street are still wary of Marvel. The stock has fallen nearly 15 percent since late June. And there are some legitimate concerns.
Could be a takeover target
Some investors appear to be worried about recent management departures at Marvel.
Avi Arad, who had been the head of Marvel's new studio unit, left in May to form his own movie production firm.
And Marvel announced in mid-July that Tim Rothwell, its president of worldwide consumer products and Bruno Maglione, president of Marvel International, were both leaving and that their responsibilities would be handled by other Marvel senior executives.
But Routh said that instead of worrying, Marvel investors might want to read between the lines. He speculates that maybe Rothwell and Maglione left because Marvel might be getting ready to shop itself to another larger media company.
"These defections may point to something going on with the company that's bigger than people realize," Routh said. "The only reason you leave is if you have a position that's significantly better or if that something is going on where you wouldn't be needed."
As such, Routh said that Marvel could be a good fit for Viacom (Charts), whose Paramount movie studio will distribute a film based on Marvel's "Iron Man" in 2008, News Corp (Charts)., which has produced all three X-Men movies and last year's "Fantastic Four," or Time Warner (Charts), which owns rival comic book publisher DC Comics. (Time Warner is also the parent company of CNNMoney.com)
And each of these media giants has a lot more global marketing muscle than Marvel. "These bigger entities already have people doing licensing all over the world," Routh said.
Evan Wilson, an analyst with Pacific Crest Securities, agreed that Marvel could be attractive to a larger media firm.
"Marvel has inroads into a very difficult to reach demographic. Their movies are typically geared to 16-to-24 year old males and that's a market that bigger media companies and advertisers are having a tough time reaching," Wilson said.
Both Routh and Wilson also pointed out that Marvel has been aggressively buying back its own stock over the past few months and that this could be a possible signal of some sort of good news in the offing.
Making its own films is a risk
Bhatia isn't convinced that an imminent Marvel sale is in the works though. He points out that Arad, who filed to sell 3.15 million Marvel shares after his departure, probably would not have left if the company was about to be acquired.
"Arad would have stayed around in my opinion if a sale was imminent since a sale would probably be at a premium to the stock's price," he said.
Arad's departure leads to other concerns. With its in-house studio, Marvel is taking steps to produce its own films instead of having to rely on larger firms such as Fox or Sony (Charts), which produced the "Spider-Man" movies and is also the studio behind "Ghost Rider," to make them.
While this could be extremely lucrative for Marvel, it also substantially adds to the financial risks for the company.
To help ease some concerns, Marvel is holding a separate investor meeting next Thursday to talk about its studio business and some of that division's projects, which include "Iron Man", a new film adaptation of "The Incredible Hulk," and a movie based on "Ant-Man."
"It is safe to say that this is the number one thing are investors trying to get their hands around, the economics of the studio business," Wilson said.
But Bhatia is concerned about the company's decision to make its own films since Arad, widely recognized as one of the top creative forces at Marvel, is no longer there to oversee the running of the studio.
"I'm a little bit skeptical about the longer-term strategy, especially since Avi Arad has left," he said.
Advanced Dark said:
PHOTO-ILLUSTRATION FOR TIME BY AARON GOODMANhttp://www.superherohype.com/forums/From the Magazine | Time Bonus Section August 2006: Inside Business
Marvel Unmasked
The incredible tale of how the comic-book company escaped disaster. Next: Can our hero survive its own ambitions?
By KATHLEEN KINGSBURY
SUBSCRIBE TO TIME
MORE BY AUTHOR
Posted Monday, Aug. 7, 2006
For most, it was simply a poignant moment in June's World Cup. Scoring his team's third goal to seal a victory over Costa Rica, Ecuador's Ivan Kaviedes pulled out a Spider-Man mask from his shorts, donned it and danced across the field, to the cheers of Ecuadorian fans. He did so in the memory of teammate Otilino (Spider-Man) Tenorio, killed in a 2005 car crash. But Marvel Entertainment executives took Kaviedes' tribute as their own. For a comic-book publisher, it marked a feat of superhero proportions: in less than a decade, the company had pulled itself out of bankruptcy to re-establish its global brand. "We've made Spider-Man beloved in even the farthest corners of rural Ecuador," says David Maisal, a vice chairman of Marvel Studios.
Not to mention more locally--on Wall Street. Marvel stock has leaped to $20 a share, from $1 in 2000. The films it produces with studio partners have grossed $3.6 billion. Licensing deals for its 5,000 characters, including Spider-Man and the X-Men, are worth $5 billion in retail sales. Next year could be even better, with Sony's release of Ghost Rider and Spider-Man 3.
Yet Marvel's future remains a cliff-hanger. "It's definitely one of the more--if not the most--difficult companies out there to forecast," says Bear Stearns analyst Glen Reid. In late May, just as Marvel kicked off what may be the greatest test of its powers yet--a slate of 10 independently financed films--the firm stunned investors and Hollywood alike by announcing that Avi Arad, the man behind the Spider-Man and X-Men film franchises, would leave to start his own production company. Not six weeks later, two more key execs departed unexpectedly--Tim Rothwell and Bruno Maglione, heads of Marvel's licensing and international divisions, respectively, perhaps Marvel's most important priorities.
That tumult has some analysts thinking Marvel is prepping itself for sale. "These are guys who'd be squeezed out by a merger," says Jefferies & Co. analyst Robert Routh, who owns Marvel stock. "A major move would make sense by the year's end."
What a potential buyer would get is a Marvel unrecognizable from the cartoonish operation it was eight years ago. First, owner Ron Perelman pillaged Marvel for cash and floated $250 million in high-yield debt. The weakened company couldn't make the payments and went bankrupt in 1996. Perelman had also sold off much of the company's most valuable intellectual property.
In 1999, Ike Perlmutter, who had bought control of the distressed outfit the previous year, hired as CEO Peter Cuneo, who had turned around such companies as Remington, Clairol and Black & Decker. Under the duo's guidance, Marvel slowly transformed itself into a conservative but lucrative licensing business. "I always tell people that when you come out of bankruptcy, it's like chemotherapy. You may be cured of cancer, but you're still very weak," says Cuneo, now a Marvel vice chairman. "But then along came Spider-Man."
The huge success of the first Spider-Man movie, in 2001, not only saved the day for Marvel but also set its business model in motion. Because Spider-Man's theatrical rights had been sold to Sony, Marvel received just 5% of the $400 million U.S. box office. But it raked in millions by licensing the Spider-Man brand, including $155 million from toys in the first year.
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Marvel soon replicated that model with hundreds of its heroes, now bringing in nearly $230 million annually from more than 500 licensing partners. Today the Marvel brand adorns everything from toys, games and apparel to hotels and theme parks. "Marvel has the best array of characters of any licensor in the business," says Brian Goldner, president of Hasbro's U.S. toy division, whose company in January guaranteed Marvel at least $205 million for its toy licenses over the next five years.
The key to Marvel's future, though, is not trinkets but storytelling. Marvel's most iconic characters were created in the 1960s by comic-book legend Stan Lee, but 30 years on, the stories had become tired, and comic-book sales were miserable. So in 2002 Marvel began to hire writers and artists from outside the comic business, turning instead to TV and film writers and novelists. The results have reinvigorated the industry, says Gerry Gladston, a co-owner of New York City's Midtown Comics. "The stories have gotten better and better, fans are thrilled, and sales are climbing," he says. Marvel produces about 70 titles a month these days, and its market share of the $450 million industry has nearly doubled since 1999. Gladston adds, "Marvel's pretty much rocketed all publishers into a new age."
Buoyed by its hits, the company has turned its attention to frontiers previously left unexplored. Many of its comics now arrive from cyberspace, and the amount of interactive features and user-created content on its website increases daily. Marvel is also exporting its characters. In Japan, Spider-Man is a 4-ft. version of himself. In India, he exchanges his blue-and-red suit for more native garb. "Our strategy is to find best-in-class partners in those respective parts of the world and use their expertise and cultural knowledge," said Rothwell before exiting Marvel in late July. "We allow our characters to transform for the local culture."
Marvel management still sensed it was leaving money on the table. For years it watched studio partners reap billions while the company took home only a small percentage of movie profits, especially on DVDs. "If we wanted to control our own destiny, we'd have to make our own movies," says Michael Helfant, president of Marvel Studios. That was a leap Marvel's risk-averse board was loath to make on its own dime.
Instead, Marvel secured a $525 million nonrecourse credit facility--other people's money--from Merrill Lynch to make 10 films by 2012. Production is under way for the first, Iron Man, to be released in May 2008. Marvel's new studio can spend up to $165 million a flick--still relatively low for the production of an action film with sophisticated special effects, warns media analyst Harold Vogel. "And they've got to create excellent stories to stick out in the oversaturated superhero genre," Vogel says. If the studio goes over budget on a film, Marvel could be forced to use some of its own cash or seek out a partner.
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The biggest risk is that a dud at the start could imperil the value of the 10 characters Marvel plans to use in subsequent movies, including the Incredible Hulk. So while Marvel isn't risking any of its own cash, "there's no question that there would be a perceptual impact on the stock," says Cowen & Co. analyst Lowell Singer. Which is why Marvel left many scratching their heads when it let producer Arad strike off on his own. "Avi's contract was up in November, and Marvel couldn't afford the compensation he can demand," Cuneo explains. "So we thought we'd let him leave on our terms." One being that Arad will be involved in at least the first three Marvel films.
Others see Arad's exit as a sure sign that Marvel will soon change hands. Perlmutter is a candidate to buy some 20% of the company that he doesn't own; so is a private equity firm. Another logical buyer is Paramount, which will distribute Marvel's film slate. The studio is revamping, having recently bought rival DreamWorks SKG. Other names thrown out include Disney, which owns a large chunk of the Marvel library, and even TIME's parent, Time Warner, which owns Marvel rival DC Comics.
For now, Marvel must focus its energy on making its movies successful. That means getting its house in order and curtailing further executive turnover. As the Motley Fool's Tim Beyers noted, "There's simply no way the comic-book publisher will become a movie mogul with a mishmash organization." Even if it does have superhuman strength on its side.
Advanced Dark said:
Advanced Dark said:
The party boat has a long ride ahead of it. These prices are still cheap for long term investment. Should be double these levels by 2008.hippie_hunter said:
Advanced Dark said:
jaydawg said:
