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Date: 1/23/2005 Ticker: MVL Stock price: $17.60 Market Cap: $1.85B Enterprise Value: $1.83B (including options) 2004 P/E: 2005 P/E: 2006 P/E: Recommendation: Target price: 16.7 15.7 13.1 Strong Buy $24 Ori Eyal MBA Class of 2006 The University of Chicago Graduate School of Business oeyal@chicagogsb.edu 312-363-8599 2008 (E) 2009 (E)
2002 (A)
2003 (A)
Fy-2004 (E)
2005 (E)
2006 (E)
X-men 3, Iron Man, Punisher 2, Ghost Rider, Luke Cage, Deathlok
2007 (E)
Spiderman 3, Namor, Hulk 2, Wolverin e
Note:
Spiderman, Blade 2
Fantastic 4, Elektra
$120.0 $25.0 $70.0 $215.0 $85.2 $245.9 $500.0 $260.0 $88.6 $51.4 $400.0 $312.0 $92.2 $25.0 $429.2 $358.8 $95.8 $140.0 $594.6 $394.7 $99.7 $50.0 $544.4 $414.4 $103.7 $50.0 $568.1
2004 numbers are my estimate 2004 numbers are my estimate grows 4% annually Large jump after spider-man movie.
GROSS PROFIT:
Licensing Publishing Toys Total Gross Profit $79.6 $32.2 $45.1 $156.9 $189.2 $40.0 $39.0 $268.1 $215.0 $44.8 $91.3 $351.1 $260.0 $44.3 $18.0 $322.3 $312.0 $46.1 $8.8 $366.8 $358.8 $47.9 $49.0 $455.7 $394.7 $49.8 $17.5 $462.0 $414.4 $51.8 $17.5 $483.7
OPERATING INCOME:
Licensing Publishing Toys Corporate Overhead Operating income $69.3 $19.6 $8.9 ($17.3) $80.5 ($42.0) ($11.9) $0.0 ($4.0) $0.0 $22.6 $139.4 $25.4 $21.7 ($19.4) $167.2 ($18.7) $1.3 $0.0 $1.7 $0.0 $151.5 $160.9 $34.5 $44.5 ($21.9) $218.0 ($18.3) ($71.8) ($14.3) ($2.6) $0.0 $111.0 $182.0 $36.0 $8.0 ($23.0) $203.0 $0.0 ($73.1) ($3.9) $0.0 ($8.0) $118.0 $228.8 $37.0 $0.0 ($24.1) $241.7 $0.0 ($87.0) ($3.9) $0.0 ($9.7) $141.1 $270.9 $38.0 $25.0 ($25.3) $308.6 $0.0 ($111.1) ($14.3) $0.0 ($12.3) $170.9 $303.2 $39.0 $8.0 ($26.6) $323.6 $0.0 ($116.5) ($3.9) $0.0 ($12.9) $190.3 $101.5 $321.0 $40.0 $8.0 ($27.9) $341.1 $0.0 ($122.8) ($3.9) $0.0 ($13.6) $200.7 $91.6 Sum of PV = 503.8 Royalties to Stan Lee 36% Large jump after spider-man movie. Grows 5% annually
Interest expense Income Tax Minority interest (2) Other expense Royalties expense NET INCOME: (1) PV at 17%
$100.9 $103.1 $106.7 Source: Marvel annual reports, Marvel press releases, Marvel guidance, and authors estimates Table Notes:
1)
2)
Net income before preferred dividends. Spider-Man JV with Sony. Accounted for using the equity method until April 2004, and then started consolidating.
About Marvel
Marvel Enterprises develops, and licenses its super-hero character library which contain over 5000 characters. Its 3 business segments are licensing, publishing, and toys. The licensing segment licenses the use of Marvels characters in films, television shows, video games, toys, advertising, and merchandising operations. The publishing segment publishes comic books and also serves as the R&D arm of Marvel. The toys segment manufactures and sells Spider-Man toys. The economics of Marvels business are fantastic. Each of its 3 business segments is profitable, has very high margins, and requires little capital. Marvels CAPEX requirements are almost zero. By selling licenses for use of its characters to others, Marvel does not risk any of its own capital, gets paid substantial fees, and has its character properties developed at someone elses expense. Marvel has been recovering from bankruptcy in the last few years after it was grossly mismanaged in the 1990s. Today marvel is completely debt free, has $135M of cash on its balance sheet, and is generating strong earnings and free cash flow. Since CAPEX is almost zero, Marvel will likely use its free cash flow to buy back shares (it has already started a $100M share re-purchase). Over the past few years, Marvel has licensed characters for blockbuster film franchises including Spider-Man and X-Men. Marvels overall success depends heavily on the success of its films as these are the main drivers for all of its operations. A successful film not only provides direct revenue, but increases marvels indirect licensing, publishing, and merchandising profits. The table above shows film that have been launched and films that will be launched in the next few years. Of these, Fantastic Four, Spider-Man 3, X-Men 3, Namor, and Wolverine all have blockbuster potential.
Competition
Marvels characters compete with characters from DC comics and other (much smaller) comic publishing franchises. The 3 top characters in the DC comics franchise (superman, batman, cat-women) which is owned by AOL-Time Warner have been grossly mismanaged. Many fans consider the last few movies based on these characters to be insultingly bad. In the authors opinion (which is shared by many others), Marvels characters are much more interesting than those of DC comics since they have a history and posses character flaws and weaknesses.
Management team
Marvel is led by Isaac Perlmutter who became CEO in October, 2004. Mr. Perlmutter, who is Marvels largest shareholder, has been actively involved in the management of the Company since acquiring its predecessor in 1990. He has served as a director of the Company since 1993, served as Chairman of the Board from 1993 to 1995, and was named Vice Chairman of the Board in 2001.
Valuation
Marvel will likely have net income of about $200M in 2009 (see model). Assuming a conservative P/E of 15 at that time, we get a market cap of $3.0B in 5 years. Since CAPEX is almost zero, I assume net income between 2005 and 2009 will be returned to shareholders through share repurchases. Plugging these numbers with the current stock price in a DCF shows an annual compounded return of 17.5% until 2009.
DCF Calculation
Net Income in 2009 Multiple M-cap in 2009 Discount Rate Present value of market-cap in 2009 Present value of cash flows between 2005 and 2009
DCF value in 2005
Explanation: $200.7M 15 $3,011M 17% $1373.4M $503.8M $1,877M From model above Conservative P/E multiple = $200.7 X 15 Discount rate for DCF calculation = $3011 discounted 5 years back at 17% From model above = $1373.4 + $503.8
EV Calculation
Shares outstanding Stock options outstanding Stock price Fully diluted market-cap Net cash on balance sheet Enterprise value 106M 10M $17.6 $1967M $135M $1832M 10M stock options outstanding at weighted average conversion price of $7.5 = ((106M + 10M) * $17.6) (10M * $7.5) = $1967M - $135M
As can be seem from this table, an EV calculation and a DCF calculation at 17% give us approximately the same value, so investing in MVL today should yield an annualized return on 17% until 2009.