- Wizard's convention business is the quintessential low asset high return business.
- Wizard's scale provides barriers to entry in marketing, celebrity draw and attendance.
- Comic cons benefit from continued monetization of superhero assets by movie studios.
- Even with the >70% increase in share price this month, we continue to see at least 46% upside in the near term, limited downside and plenty of optionality.
We find it interesting that every May articles will be written about the lessons learned at Berkshire Hathaway's (BRK.A, BRK.B) annual meeting, and blogs follow everything uttered by Warren or Charlie. We are reminded to invest in businesses not stocks, to ignore economic forecasts and for those with limited time to consider an index fund. Those ideas aren't anything new, Buffett and other super investors have drilled those ideas into our heads many times before. Although we have yet to go to an annual meeting, we have repeatedly learned how successful Berkshire Hathaway annual meetings are and how attractive a convention is from a business perspective. It is safe to assume that Berkshire's annual shareholder meeting is a wildly profitable venture for Berkshire Hathaway and that the convention business model fits well within Buffett and Munger's quality criteria. Just as long as there is something sustainable to drive individuals to attend a convention - such as hearing from the Oracle himself - the convention operator makes money in almost every direction and needs virtually $0 in assets to operate.
Wizard World, Inc. (OTCQB:WIZD) is a little known micro-cap company that is one of the larger publicly-traded organizers and marketers of live multimedia convention events in the United States. These events are considered "Comic Cons" where enthusiasts of popular fiction are entertained, meet their favorite celebrity, purchase merchandise and have an opportunity to network with other like-minded individuals. On the flip side, entertainers and the companies of popular fiction characters get plenty of marketing opportunities and the chance to sell their merchandise to thousands of attendees. Wizard World looks more like a marketing machine that needs practically $0 in assets to operate and produces plenty of cash.
Time Warner (NYSE:TWX), Disney (NYSE:DIS) and other movie producers continue to ramp up the production of comic character related assets providing a lasting tailwind for comic con convention attendance. Wizard World's scale will allow the company to continue to attract highly popular celebrities increasing attendance rates and the profitability of each convention. We will further describe the high quality nature of Wizard World's business model, sustainability, ownership, catalysts as well as why the risk/reward for Wizard World is attractive even though shares have been going higher.
Wizard World derives its roots back to Gareb Shamus founding Wizard: The Guide To Comics Magazine, in the early 90s, that listed the values of comic books. The company grew with the boom in comic interest and in later years bought other magazines and the Chicago Comicon. In the 2000s, however, websites started to pop up that mimicked Wizard magazines leading to a large decline in subscriptions. Shamus decided to quit production of the magazines and handed the reins of the company over while continuing to maintain 18% of the company today. Board member John Macaluso, since 2011, was nominated the chairman of the board and CEO.
The company diverted all of its attention towards growing their convention business. Originally, the company was trying to expand their convention reach to different cites, as sort of a land grab, but was doing it quite unprofitably. In 2011 average revenue generated per event was $420,000 and all but two events were profitable. Things changed as the company focused on fewer shows and higher profitability through more effective marketing. Since then, eight events have become profitable and average revenue generated per event has risen dramatically to $1.77 million.
Wizard World derives revenues from three avenues. First, convention attendees pay to gain entrance to the convention allowing them to dress up, meet other individuals with similar interests, see their favorite celebrity and buy character-related merchandise and artwork. Second, artists and other businesses pay to set-up at the convention and have the ability to market and sell their wares to the thousands of attendees. Third, the company can derive revenues from corporate sponsorships. The only expenses the company has is paying corporate staff which stands at 23 people, celebrities, convention space rent and marketing. To put into perspective the low asset nature of the business, cash is $5.6 million and is 137% of tangible book and PP&E, accounts receivable and inventory make up only 4% of tangible book. The company needs virtually $0 in assets to run, so it is essentially a marketing machine.
To grow a convention business like Wizard World more events have to be organized, so it takes relatively little extra in the way of costs to support this growth. The company just needs to have a firm system and foundation of employees to support growth. We believe the significant decline in operating expense margin the last two quarters illustrates that the company is likely to have achieved the appropriate scale, allowing the company to increase revenues much quicker than G&A. To illustrate this, in 2012 Wizard World had ten full-time employees, four part-time freelance consultants and operating expense margin of 33%. In 2013, there were 23 full-time employees, two part-time freelance consultants and an operating expense margin of 35%. The last two quarters, Wizard World's op ex margin has averaged 25.8% and is likely to stay at similar rates. We believe that as the company grows, operating expense margin will continually decline, however, our model (below) is that the company maintains the 25% operating expense margin.
The company produced nearly $2 million in free cash flow the past 6 months and it is likely to keep up that pace up for the rest of the year. It is hard to find another company that produces 100% free cash returns on net tangible assets (a majority of that is in cash) or 72.5% after tax returns on net tangible assets. These are returns that cannot be explained in the context of free markets, but economic goodwill does explain the returns and provides the company with a moat.
Hershey and Coke are some larger companies that come to mind that produce similar outlandish returns with their consumer relationships and brand, but GAAP accounting only accounts for assets which can be quantified and does not account for intangibles. Wizard's brand and relationship with convention attendees are thus hidden from the company's balance sheet, so once the company starts reporting a full year of profitability, the company will look wildly expensive from a price to book vantage point.
It is more likely that a company produces returns in the neighborhood of 8-10% on net assets - including goodwill and other intangibles - so we can reverse engineer what Wizard's true net asset value would be utilizing those numbers. We choose an 8% return. Using our estimate of 2014 earnings of ~$2.9 million - see below - that would indicate that there are ~$36 million in true net tangible assets (2.9/0.08= $36.25), not the $4.4 million stated on the books. Accounting then is missing ~$32 million in hidden assets on the balance sheet.
Wizard World's current EV has been fluctuating a bit from $30-$45 million ($0.8-$0.95 a share) indicating that the company is trading at a 20% discount or 11% above a true estimate of the company's book value of $36 million. Since the company is likely to be growing at a very fast pace into the future and the quality of the company is high, we would expect the company to be trading at a much higher multiple above true book value.
Superhero films continue to generate popular interest in comic-related characters and have been driving the growth of Comic conventions. Although this is a trend based on popular perception, we see this as sustainable at least for the next ten years.
Movie producers know that superhero-related films are likely to draw the largest revenue streams and it is not a surprise why there have been so many superhero movies in the last two decades. To put into perspective how successful these films are, 40% of the top 10 highest grossing films of all time are based on comic characters derived from Marvel and DC comics.
We think that there is a high likelihood that the future movie production pipeline for Warner Brothers, Disney, etc is full of comic character based films. There still are many characters that have yet to be put into a movie and monetized. Additionally, the movies that have already been produced have the ability to expand their franchises. To give an example, the Spider Man franchise has grossed $4 billion in revenues and there is likely to be further sequels. The Iron man franchise has produced $2.4 billion in revenue. These franchises are on-par with The Lord Of the Rings franchise which generated $2.92 billion. Disney's acquisition of Marvel for $4 billion in 2009 looks to be a very smart move.
Wizard World can differentiate itself from competitor Comic Cons by the caliber of celebrities that attend the show. The company's larger scale operating across many different conventions in the US allows them to hire a celebrity for more than one Comic con. Wizard conventions then become similar to a music tour for a band, but for celebrities. Moreover, celebrities' time are finite, so if Wizard World is able to get Patrick Stewart or Lou Ferrigno for 5 shows during the year, then that is 5 weekends that Patrick Stewart and Lou Ferrigno can't be at another show.
Artists and other businesses that would like to market and sell their works would also be drawn to the conventions with the largest attendance, making it difficult for another comic con to open up on the same weekend - or other time during the year - and the same city as Wizard World's conventions. Observing past schedules, it is hard to compete with an established comic con in a city. An example would be Wizard previously performing poorly in New York City with their Big Apple Comic Con in the spring, when the NYC Comic Con event in September draws in huge amounts of attendees and is very well established. Looking to 2015 Wizard World does not have a convention set for NYC. Yet, there is opportunity for Wizard World to acquire this convention in the future with enough cash.
Marketing scale is also another moat for Wizard World. The larger the company becomes, the more it can maximize the efficiency of each marketing dollar spent, thus allowing them to outspend competitors on marketing and provide a barrier to entry. Wizard World's national reach allows them to centralize their marketing and reach a wider audience. Other one off comic cons are likely to have less marketing efficiency since their reach is only one show instead of multiple shows over multiple cities. Although Wizard World does not break out marketing spend, a hypothetical example illustrates the marketing efficiency:
Say Wizard spends $5 million in national marketing in a year and only $30,000 for each specific show (Total cost to run an event is in the $1-$1.5 million range). If each event attracts 20,000 attendees over 16 events, marketing spend per event would be $314,375 per event or $15.72 a person. Of course, more shows will allow the company to drive more efficiency out of their marketing.
A new entrant with one show might have to spend much more per show to attract the same number of attendees (social media, TV, news, flyers, etc.). Say an entrant needs $1 million to attract 20,000 attendees. The marketing spend per attendee is much higher at $50 a person. Since tickets usually cost $65-$95 a person that means that these convention operators are far less efficient in attracting attendees and have to make revenue from sponsorships, and other avenues.
What the Market is Missing
Wizard World got a boost in publicity from the July Bloomberg TV interview with the CEO and better earnings. While these events have brought a more attention to Wizard World, and a 75% higher share price this month, Wizard World continues to be undervalued due to its small size, illiquidity and limited institutional and analyst sponsorship. While small size and illiquidity are looked down upon by many, those characteristics often allow investors to own quality companies for a discount. We believe that shares have at a minimum of 46% upside in the next few years to catch up to a market rate of return, and there is potential for significant further upside if the company is able to profitably operate 30 shows by 2017. To put that number of shows into perspective, 2015 will have a minimum of 22 shows.
Since the size of Wizard World is generally off limits for larger investors, retail investors are likely to be looking at historical numbers, which do not look too attractive. The company has been profitable the last two quarters, yet trades at a high multiple to trailing-twelve-month revenues, EBITDA, etc,. To see the true value of the company, one must conservatively estimate how profitable the company is likely to be a few years into the future.
In 2013 there were only eight events and so far this year there have been eight events, but there are an additional eight events the rest of the year. Since Wizard schedules its events ahead of time, it is somewhat less of a crap shoot to estimate a rough idea of how much the company can earn in the future.
The company has been earning more revenue per event each year and is likely to continue that trend as they build each convention each year through marketing. Our model is based on the company achieving the current average revenues per event of $1.77 million ($2 million in Q3), since new events are likely to draw down the increasing revenues of the established events. Below, we have included our estimates of the rest of 2014.
(Source: Author's Rough Calculations)
Wizard World currently has a market cap of ~$47 million and deducting cash the EV is $41 million. We believe that it is a safe bet that the company will be able to achieve >$4 million in pre-tax profits yielding 10% of today's EV. The company is likely not to pay any taxes this year, but in the event it did pay 33% tax, net-income would be roughly $2.9 million. Wizard then would be trading at ~14x forward earnings.
While forward yield and P/E gives us one perspective, the growth of the company is expected to be quite large. With large somewhat predictable growth we like to take a Murray Stahl approach and estimate what the company is likely to look like 3-5 years down the road and discount it back to today to figure intrinsic value. Wizard is scheduled to run 22 shows next year or 37.5% more than this year. Utilizing the same average revenue per event and estimating a similar EBIT margin of 12% would yield $37.4 million in revenues and $4.5 million in EBIT.
TAM & Future Earning Potential
Twenty two events is the minimum number of events the company is likely to organize in 2015, so it does seem likely Wizard can host 30 events in 2017. According to 2013 US Census estimates there are 113 cities with >200,000 population in the US, so 30 cities would only be 26.5% of that total and a realistic number the company could achieve. There would likely still be much more runway ahead of the company in the US alone.
Again, utilizing similar average revenues per event of $1.77 million, then it is likely that the company could achieve more than $53 million in revenue (30x1.77=53.1). We expect EBIT margin of 15% or $8 million, but there is potential for the company to drive efficiency from fixed G&A resulting in a higher EBIT margin. We will stick with the more conservative 15% number.
A company with high returns on practically zero assets, little debt and huge cash flows should fetch at least a 10x multiple on pre-tax earnings. In Wizard's case, we estimate that the company could be trading at $80 million ($8 EBIT x 10) 3 years in the future. Discount that back to today and the return should be 27% compounded annually. Market rates for equities tend to revolve around 8-10%, so discounting $80 million to today at 10% would indicate a present value of $60 million or 46% higher than today.
Further, there is the optionality that Wizard World hosts more than 30 events and drives more than $1.77 million in revenue per event. The number of events is growing at 36% and annualize that 3 years would indicate 40 shows by 2017. This still would only be 35% of the total cities in the US with populations over 200,000. Events will have been operating much longer, and further superhero movies could drive profitability to $2 million a show. At an EBIT of 15% the company should produce $12 million pre-tax. A ten times multiple would indicate a $120 million valuation. Discount that back to today at a 10% rate and the intrinsic value would be $90 million or 120% higher than today's value.
There is also the potential for the company to expand internationally since superhero films are distributed globally. We think that the TAM internationally would be restricted to the very large metropolis, over 2 million in population indicating that there could be a potential for 220 more cities. Even though this is a potential, we do not anticipate it happening anytime soon and thus do not take it into consideration, but gives us an idea of further optionality.
If we imagine the company can produce thirty shows in 2017 but only achieve $1.3 million per show (2013 average), then revenues would be $40 million. An EBIT margin of 12% would yield nearly $5 million in EBIT and a 10x multiple would mean the company would be trading at $50 million. Discount that back to today and the rate of return would be ~7% compounded annually - an average market return. Any way we look at it, there is likely to be very little downside at today's prices and significant upside with a conservative outcome.
As we described above, the company generates around $4 million a year, so three years out from today the company should generate $12 million and include the $5.5 million today and you quickly see that shareholders should "recoup" roughly half of their investment in 3 years. We could see the company giving back a large dividend or purchase shares.
Wizard World has large insider ownership. CEO John Macaluso owns 16.43% of shares and director Paul Kessler, Principal Manager of Bristol Capital Advisors, owns another 16.85%. Director Kenneth Shamus indirectly owns a large portion through his owned companies and the original founder Gareb Shamus continues to own 18.65% of the company. It is likely that these owner operators will run the company to the long-term benefit of all shareholders.
Observing from the past actions of the management team, Gareb Shamus made a wise decision to get into the Comic Con business and discontinue the magazines, although it could have been done sooner. Gareb Shamus also looked like he was not the best fit to run the convention business as profitability was low, but his decision to step down to have someone else run the business was a wise one. John Macaluso has been able to drive significant growth in event profitability and looks to be a wise marketing operator for the company.
- More superhero related movie titles will continue to widen the audience of comic convention attendees as well as drive demand to attend these conventions. Currently, we know that the Avengers: Age of Ultron, Fantastic Four and Ant Man will be in theaters in the summer of 2015. Additionally, Captain America: The Winter Soldier, Wolverine and Batman Vs. Superman will be hitting movie screens in 2016. There are also other films that could be produced in the next three years such as Justice League and many others that could increase awareness of superheroes and subsequently drive comic con attendance.
- As the company continues to grow it will likely get noticed by the smaller institutional funds. Additional profitability for each convention event could also prove to be a catalyst for further value growth.
- Greater investor relations efforts and a possible uplisting to a larger market, through organic share price growth, could also serve to be a large catalyst for value growth.
Although we know that there is a large pipeline of superhero movies that are to come out in the next few years, each one of those movies could turn out to be flops. With moderate box office success these films could lead to a drop in popular perception and demand for all things comic related. Lower demand then could drive down attendance to Comic Cons. We feel that the celebrity guests that are showcased at each Comic con is a mitigating factor that could continue to generate a reason for individuals to go to a comic convention.
Wizard World could cancel events, which would both hurt the company's profitably and temporarily send shares lower. This has happened in previous years, however, it was due to the company trying to expand quicker than it could sustain profitably. We believe that the previous growing pain was a learning experience that enlightened management. They made the smart move and cancelled to work on marketing. The revenue per event has skyrocketed since with more events, so their move was a wise one.
A recession could impact the attendance to both movies based on comic book superheroes as well as the attendance to comic conventions. We think this risk is mitigated by the wide demographic reach of comic conventions and also the celebrity appearances at the conventions. Even if a recession were to take place, our downside model includes a 25% drop in average revenue per event and still earn a return.
Competition from the San Diego International Comic Con and the NYC Comic Con should persist, however, there is no other competitor trying to operate a Comic Con across the US on a large scale. Even if there were to be one, individuals are familiar with the Wizard Comic Con and Wizard is likely to continue to draw top celebrity talent. Also, Wizard has the scale to out market a new entrant.
We've learned from Berkshire Hathaway and many others that the convention business model is quite attractive. There are virtually zero assets and high returns as long as the company can market and draw a large crowd. Wizard World is unmatched in scale in the US comic con scene and has the scale to market and bring in top celebrity talent. The company benefits from the large pipeline of superhero movies and shares trade at a significant discount to intrinsic value. Many catalysts are on the horizon that could send shares 46% higher - and potentially much more - while there is very little downside.
Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Additional disclosure: This article is meant for instructional purposes and not meant as a recommendation to buy or sell. The only kind of intelligent investing is through your own due diligence. We do own shares of BRK.B.