David Locke

Marvel Enterprises: The Movie's Just Started

The announcement today is, as you state it, a timing surprise and not a real "earnings" surprise. Does not change the amount of total profits I expect Iron Man to generate; just that some of it is coming in sooner rather than later.

This also goes to why in my "valuation" section I stay away from earnings estimates and multiples, as estimating quarterly or even annual earnings for a movie studio is a fool's errand. Yeah, management was only off in their estimates of Marvel Studios revenue for CY08 by half, even when they knew full well when they made the estimate exactly how much box office Iron Man and Hulk had generated.

There was in my opinion a more important piece of news announced today (which maybe I'll write about tomorrow, though maybe no one will care with the markets acting the way they are), which is the new Paramount distribution deal. Basically the huge success of Iron Man (and the likely huge success of Iron Man 2 &3) has allowed Marvel to get better terms on distribution. While this doesn't really change the value of the Iron Man franchise per se, it adds value to the whole of Marvel Studios (as it allows Marvel to keep more of the revenue / give less to Paramount). Anyway things are progressing quite nicely in my opinion.

Marvel Enterprises: The Movie's Just Started

Sony still controls SpiderMan movie rights, as does Fox with X-Men. Those rights will likely never revert to Marvel (they'd basically only revert back if they weren't worth anything anymore; like with Universal giving Hulk back). Spidey licensing rights (so not the movie, but the rights to license out SpiderMan for toys and t-shirts and video games and whatnot) reside in a JV with Sony (SpiderMan Merchandising LP). X-Men licensing rights (again, not the movie but the rights to license the characters for toys, video games and stuff) primarily reside with Marvel.

Marvel Enterprises: The Movie's Just Started

well I really didn't "leave out" the theme park, musical, internet comics, et al; these would be included in what I call "base Marvel" in the valuation section. for 'base Marvel' to keep generating ~$150mm of free cash a year they have to keep coming up with new things in comics, licensing, and new ways to exploit SpiderMan; and IMO this management team has proven that it can in fact find new and different ways to generate licensing income which is what gives me confidence that one can responsibly put a 14-15x multiple on that earnings stream.

Plus frankly all of those things pale in comparison to what Marvel Studios could become in time. I don't think people really appreciate the overall success of the 'superhero' genre of movie. Make a good movie like Dark Knight or Iron Man and you have a billion dollar franchise; make a piece of junk movie like Fantastic Four or the first Hulk and it really doesn't hurt you (at least in terms of lost dollars; there is a lost opportunity cost); presumably because there are giant core fan bases for these films so even a piece of garbage will get enough 'fanboys' (and their protesting girlfriends) through the door to recover its costs.

of course $70 could be a "lowball" projection if everything breaks right; but you have to assume that some of the movies will be duds, and that some of the licensing opportunities won't really pan out. sure, if "SpiderMan-The Musical" has a Producers-like run, if Captain America does Iron Man business and Avengers does LOTR business, if we're all reading comic serials on our iPhones, then yeah $70 will turn out to have been way too conservative. but history shows that, while most of what Marvel does works out, some things don't (like the Incredible Hulk "reboot"). So $70 passes a first-order reasonableness test for me in terms of a central-tendency kind of price target. the "every Marvel management idea turns to gold" price target would certainly be higher than $70, but every stock on planet earth would have a price target of double or triple the current price if that was how one went about analysis.

Cheers