Marvel Entertainment: Superheroic Comeback

Travis Johnson submits: Marvel Entertainment (MVL), home of my childhood favorites the X-Men, has quietly had a spectacular month in the stock market, rising from depths of around $17 to Tuesday's close well above $23.

This recovery was expected by many folks, though I had thought and hoped it would take longer, and thus I missed the recent opportunity to buy at the bottom.

The past twelve months have been weak ones for Marvel, as they redid their toy licensing program and moved manufacturers, which brought with it some short term costs. They also offered up a small movie slate for 2006 as analysts debated their decision to take some additional financial risk by producing their own films starting in 2008. Even the expected blockbuster status of X-Men 3 didn't really move the needle for the company this year.

So we were left to spend the summer pondering just how weak the shares might get during a movie-less fall and how strong they might get as soon as investors begin to look forward to 2007, which will include one guaranteed blockbuster (Spiderman 3 in May, one likely one, (Fantastic Four: Rise of the Silver Surfer in June), and one possible hit,( Nicholas Cage's Ghost Rider in February), and to 2008 which will bring the first of Marvel's self-produced films,( Iron Man, scheduled for May). The full projected slate, out a few years, is here.

I've heard investors say that a six-month time horizon is fairly typical of Wall Street investors, and that Wall Street is predicting that the company will begin performing well right about when Ghost Rider hits the theaters in mid-February, since that's six months from when this upward move will begin. There's also word that the Q1 report will be great next year, perhaps because of strong X-Men DVD sales. I was thinking that Ghost Rider would be likely to fly under the radar, and that a big move like this would be more likely later in the winter, when the Spiderman hype will begin in earnest.

But a nice earnings release in early August helped to spur interest in the shares again, and more visibility of their new film financing deal certainly helped. Marvel beat some pretty low benchmarks that had been lowered over the winter, and increased their guidance slightly for the year, due mostly to the fact that they've been borrowing lots of money for a stock buyback. I'm not crazy about that decision, but it's certainly working so far.

And today, Citigroup (C) initiated coverage at a buy on no "new news," and published a $27 price target, which is currently the highest analyst's target out there. It sounds to me like the analyst, who specifically noted the likely boost in the share price that Spiderman 3 will bring next May, wanted to be the first one to talk aggressively about this now that the hype is only a few months away.

Marvel is a company that I probably won't ever sell entirely, partly for sentimental reasons, but if the share price returns to the levels we saw in early August, well under my cost basis of about $18, I'll probably try to be a little more aggressive in picking up additional shares.

MVL 1-yr chart: