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Author: awesomestockdude Big red star, 1000 posts Ticker Guide Supernova Odyssey 1
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Subject: Marvel Write-Up Date: 2/15/2009 3:36 PM
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Description-

Marvel Entertainment, Inc. engages in the licensing, publishing, toy making, and film production businesses with a proprietary library of approximately 5,000 characters in the United States and internationally. The company operates in four segments: Licensing, Publishing, Toys, and Film Production.

The Licensing segment licenses its characters for use in various consumer products, including toys, clothes, games, electronics, gifts, collectibles, theme parks, etc.

The Publishing segment publishes and sells comic books and trades paperbacks through comic book specialty stores and retail outlets, including bookstores and newsstands. This segment also publishes custom comic books and sells advertising and subscriptions.

The Toys segment offers character-based toys and licensed-in characters, such as Curious George.

The Film Production segment develops, produces, and distributes films.

Economic Moat-

Yes they do have a strong economic moat. First of all, they are number one in what they mainly do, which is license and make movies based on super heroes. They have been around a long time and people know about them, which gives them a strong brand name. These two factors (top dog and strong brand name) give them a large moat with a big advantage. As they enter the movie world more I bet we will see more pressure on their moat because of harder competition. I still think that they will keep an advantage which leads to them keeping their moat.

Competition

They do have some competition but it is not much. Basically all movie making companies are their competition, but within superhero movies they definitely are number one and are way ahead of everyone else within their segment. Some people think that the companies that make Spiderman and other superhero movies are competition. Actually they are pretty much working for Marvel, because they bought the rights from Marvel. Yes, Marvel does not make as much money this way, but its better then nothing. Now though Marvel is starting to make movies on their own so that way they get to keep all the profit to themselves. There is a risk to this because they have only made two movies (Incredible Hulk and Iron Man) so far so it’s hard to base the quality of their movies and what people think of them. It’s hard to tell now how the movies will do because one movie did okay and the other did really good in theaters.

They have sold their Spiderman, Fantastic 4, X-men, and Wolverine rights to other companies, but they still make some of the profit. During the past quarter, licensing segment net sales decreased $24.1 million, but is not necessarily bad because now Marvel is trying to keep the big rights to themselves, so that they can make the movies themselves and keep all the money in the future. It could have negative short term results but in the long term it should turn out stronger than it is now. The risk to this now is that with millions of dollars never to be seen again, and with the possibility of not having a steady stream of income is that there is a chance that you could never get the money back if the movies turn out unsuccessful. The chance of this happening in my eyes is small but it is always possible.

Their advantage compared to other companies is that they have a library of over 5000 characters so the possibilities are nearly unlimited. I do think though that not all superheroes will turn out strong in public view. I do not think this will be a major problem because they could always recycle characters after a couple decades.

Income statement-

I will be using the latest quarter report’s numbers to find the different rates and ratios of MVL.

-Revenue has grown very strongly over the past few years. (Awesome)
-Cost of revenue has bounced around over the past few years. (Fine)
-Gross profit has been rising strongly with the Gross Profit Margin of 67%. (Fantastic)
-Selling, general and administrative is 29% of Gross Profit. (Great)
-They have no Research and Development cost. (Magnificent)
-The depreciation cost is 0.33% of the gross profit. (Stupendous)
-The interest expenses are 6.41% of operating income. (Grand)
-The income taxes paid are about 36.43% of income before taxes which shows they are paying their taxes. (Amazing)
-Net income has had a rough ride but seems to be growing back. (Fine)
-EPS has been slowly rising over the past decade. (Good)
-Profit Margin is at a strong 28%. (Wonderful)
-Operating Margin is awesome 48%. (Impressive)

All in all, this income statement is terrific! They have had great growth rates in everything from revenue to earnings. They don’t have to pay for R&D which is a huge plus. They pay their taxes and their margins are awesome. This statement is great and I just wish all my company’s I own have one as strong as Marvel’s!

Balance Sheet-

I will be using the latest quarter report’s numbers for the past nine months for the balance sheet.

-Their cash has been growing quickly over past years. (Astonishing)
-Net Receivables is 18% of Revenue. (Okay)
-Current Ratio is at pretty low 0.62. (Fine)
-P,P&E has been decreasing compared to the past few years. (Good)
-Goodwill hasn’t risen much at all over the past few years. (Okay)
-Long Term Investments have fallen. (Not So Good)
-ROA is at 6%. (Low)
-No Long Term Debt. (Wondrous)
-Debt to Shareholder’s Equity is at pretty high 1.65. (Could be better but has shrunk)
-No preferred stock has been issued. (Great)
-Retained Earnings are growing very strong. (Awesome)
-They have been buying back shares (Stunning)
-Return on Shareholder’s Equity is at 15%. (Good)

The balance sheet looks great too! Their cash has grown strongly so they should be prepared well in the future. The current ratio is low but it okay because of strong earnings that should cover up some liabilities. Apparently MVL hasn’t been acquiring many companies but that’s fine for the time being. With what I see, the company has no long-term debt which is fantastic, but long-term investments have fallen. The two best things I see is that the retained earnings pool has been growing strongly and the company has been buying back shares in their company. This should open up opportunities later for the company and increase the stocks value in the present.

Cash Flow-

This is the area I’m not very familiar with, but I’ll try to do what I can.

-Capital Expenditures have fluctuated but don’t seem high. (Good)
-Capital Expenditures are only a tiny bit of net income. (Incredible)
-Marvel has bought back some shares. (Superb)

Capital Expenditures are low and barely affect net income at all which is great! They have also bought back shares. I know this is short and missing a lot of information so feel free to add whatever you guys would want to fill in the gaps that I missed.

Management-

For any individual investor analyzing management should be the most difficult part because none of us can go talk to them and ask whatever questions we have. Here is a list of the board of directors and other things they are involved in taken from the proxy statement-

Sid Ganis- He is 68 years old and has been a Marvel director since October 1999. Mr. Ganis is the President of the Academy of Motion Picture Arts and Sciences, the organization that awards the Oscars. Mr. Ganis has been President of Out of the Blue...Entertainment, a company that he founded, since September 1996. From January 1991 until September 1996, Mr. Ganis held various executive positions with Sony Pictures Entertainment, including Vice Chairman of Columbia Pictures and President of Worldwide Marketing for Columbia/TriStar Motion Picture Companies.

James F. Halpin- He is 57 and has been a director since March 1995. Mr. Halpin retired in March 2000 as President and Chief Executive Officer and a director of CompUSA Inc. Mr. Halpin is a director of Life Time Fitness, Inc.

James W. Breyer- He is 46 and has been a Marvel director since June 2006 .Mr. Breyer has served as a partner of the Silicon Valley-based venture capital firm, Accel Partners, since 1995. Mr. Breyer is a director of Wal-Mart Stores, Inc. and Real Networks, Inc. Mr. Breyer also serves on the boards of various privately held companies. Mr. Breyer is a member of the Board of Dean’s Advisors to Harvard Business School and is Chairman of the Stanford Engineering Venture Fund.

Laurence N. Charney- He is 60 and has been a Marvel director since July 10, 2007. Mr. Charney retired from his position as a Partner of Ernst & Young LLP in 2007, having served that firm for over thirty-five years. Mr. Charney previously served as an audit partner and was Marvel’s audit partner for its 1999 through 2003 audits.

F. Peter Cuneo- He is 63 and was Marvel’s President and Chief Executive Officer from July 1999 through December 2002 and served as the part-time Special Advisor to Marvel’s Chief Executive Officer from January 2003 through December 2004. Mr. Cuneo has been a Marvel director since July 1999, and since June 2003 he has served as a non-executive Vice Chairman of the Board of Directors. Mr. Cuneo is a senior advisor to Plainfield Asset Management LLC. Mr. Cuneo is a director of Iconix Brands, Inc.

Morton E. Handel- He is 72 and has been the Chairman of the Board of Directors of Marvel since October 1998 and was first appointed as a director in June 1997. Mr. Handel is a director of Trump Entertainment Resorts, Inc. and served from 2000 until February 2006 as a director of Linens ‘N Things, Inc. Mr. Handel is also a Regent of the University of Hartford and is active on the boards of several not-for-profit organizations in the Hartford, CT area.

Isaac Perlmutter- He is 65 and has been Marvel’s Chief Executive Officer since January 1, 2005, has been employed by Marvel as Vice Chairman of the Board of Directors since November 2001, has been a director since April 1993 and served as Chairman of the Board of Directors until March 1995.

Richard L. Solar- He is 68 and has been a Marvel director since December 2002. From June 2002 to February 2003, Mr. Solar acted as a consultant for Gerber Childrenswear, Inc. From 1996 to June 2002 Mr. Solar was Senior Vice President, Director and Chief Financial Officer of Gerber Childrenswear. Mr. Solar is also Vice President and Treasurer of Barrington Stage Company, Inc.

Marvel’s board seems good and experienced to me as much as I can tell from this. Most of them have been with the company a long time and they all seem to be experienced from working with other companies in high up positions. Now for the Executive Officers other than Mr. Perlmutter whom we have already covered-

Alan Fine- He is 57 and has served as Executive Vice President and Chief Marketing Officer of Marvel Characters, Inc. (a wholly owned subsidiary of Marvel Entertainment, Inc. that owns and licenses Marvel’s intellectual property library) since May 2007. Mr. Fine also has served as Chief Executive Officer of Marvel’s publishing division since September 2004, and as Chief Executive Officer of Marvel’s toy division since August 2001 and from October 1998 to April 2001.

David Maisel- He is 45 and has served as Executive Vice President, Office of the Chief Executive since September 2006 and became Chairman of Marvel Studios in March 2007. From September 2005 until September 2006, Mr. Maisel served as Executive Vice President, Corporate Development and from September 2005 until March 2007, Mr. Maisel served as Vice Chairman of Marvel Studios. From January 2004 to September 2005, Mr. Maisel served as President and Chief Operating Officer of Marvel Studios. From October 2001 to November 2003, Mr. Maisel headed Corporate Strategy and Business Development for Endeavor Agency.

John Turitzin- He is 52 and has served as Executive Vice President, Office of the Chief Executive since September 2006. From February 2006 until September 2006, Mr. Turitzin served as Marvel’s Chief Administrative Officer. Mr. Turitzin has also served as an Executive Vice President and General Counsel since February 2004. From June 2000 to February 2004, Mr. Turitzin was a partner in the law firm of Paul, Hastings, Janofsky & Walker LLP.

Kenneth P. West- He is 49 and has served as Executive Vice President and Chief Financial Officer since June 2002.

The executives also seem good and experienced by being with the company a while. There are a few questions one should ask though so that they can understand the management better. Here they are-

Is management determined to help the company?

I believe they are determined. They have totally changed their business model towards making their own movies so that revenue and earnings will increase. This in itself shows that they are trying to make the company succeed more. This question is hard to answer without actually talking to them.

Does management share everything to shareholders?

I wouldn’t say they tell everything because some things probably shouldn’t be told or can’t be told, but I think they are open to most things. I can’t tell perfectly because I haven’t followed the company much, but to me they seem to be open with the company’s plans and are telling shareholders about it. While skimming through a couple reports they seem not to be hiding information. It is always a good sign when management tells you everything and nothing seems to be going badly.

Do they work for the love of the company instead of the pay?

Once again it’s impossible to tell if they love the company unless they actually say so themselves, which I haven’t heard them say. But we can look at their salaries and bonuses. The executives do make a lot of money (most of them millions) after adding in salary, bonus, stock awards and options, and from compensation, but it doesn’t seem too high. As a matter of fact, all 5 executives had a rising salary the past year but only 3 out of the 5 had their total amount rise. By the fact that management isn’t overdoing their salary is a good sign.

Does management believe in the company by buying their own shares?

According to Yahoo insiders own 38% of the company. That might be a little off but I bet its close. No matter how close, that amount is great! If that huge of an amount is owned by insiders that definitely proves that they think MVL is going to do well in the future.

For more information on the management check out Marvel’s proxy statement-

http://www.sec.gov/Archives/edgar/data/933730/00011166790800...

Catalyst-

Catalysts are very important and I believe that MVL has some really good ones. The biggest catalyst I see would be when they come out with a movie. Right now that is what makes their revenue and earnings shoot up and it would continue to help even more when they come out with more movies. This year there isn’t anything coming out big except for Wolverine (which was licensed out), but by 2010 they are starting to come out with more movies. This includes Iron Man 2, Thor, The First Avenger: Captain America, and Spiderman 4 (which MVL only makes part of the profit from). Right now it is hard to tell how the movies will do, but I believe the majority of them should do well. The only one I am worried about is Spiderman 4 because to me the name seems to be dying out when you look at what the last movies made in theaters. I doubt it should hurt MVL that much, but it could cause some price volatility.

Another big catalyst is the economy, which could be considered a catalyst for most any company. I don’t see any signs of the economy picking up at all but when it eventually does it should help a lot. When it does, people will most likely spend more money on going to movies, buying DVDs, and buying comic books that Marvel produces. At least they seem to be able to grow their numbers as everything else is falling. That is a good sign of a strong company. And since their price has been falling too, it also means that the company is undervalued.

There haven’t been any acquisitions to serve as catalyst but as business grows I think that acquiring other companies could serve as a catalyst if that is what management decides to do. Buying back shares is a catalyst, because that increases the value of each share of stock, which I’m sure we all love! Let’s just hope they continue to do that as time goes on!

Balance-

This is very important because it helps us review to see if both quantitative and qualitative are strong.

For quantitative qualities we see that Marvel has had great growth rates in the past. They are doing well at keeping costs and debt low and they are being successful at keeping strong margins. They have a nice growing pile of cash and have a large growing retained earnings pool, which will help them down the road if they ever decide to acquire other companies, buy back more shares, or even pay a dividend. As the company continues to make movies we are expecting more record revenue and earnings to come out in the future.

From the qualitative view we see that Marvel has a strong moat. We also see that while there is some risk in a new business model, there is also a great possible upside. Management seems strong, experienced, and determined to make the company the best the can be for the long-term. The company has two main catalysts, which are more movies and a better economy that should help boost the company higher in the future. They also have toys such as action figures made by Hasbro that could help make even more profits.

When we put the quantitative and qualitative qualities together, we see a great mix. Both areas are strong and should work together well to make MVL even a better company as time goes on!

Margin of Safety-

Right now the price of MVL is $25.31. The 52 week high is $38.50 and the low is $23.28. With the P/E ratio (ttm) at 11.69 and the price only 7% from the year low it seems like to a lot of people that now is a good time to buy. It really could be, because I believe that in 3-5 years the price will be much higher than it is now as long as the company continues to make money. In the short-term the upcoming earnings report on February 24 could make a difference in the price. I would expect it to outperform analyst expectations and go up, but you just never know. Within this upcoming year, the price could falter some because there isn’t much going on this year in the company. The next year however I do expect things to pick up. The question is, do you want to buy now at a good price or do you want and wait to see if there will be a better price in the future with a chance that there won’t be another offer as good as now? It’s a tough question and will have a different answer for everyone.

Conclusion-

After researching I am seeing that Marvel is a marvelous company with a marvelous future! If their new business model turns out to be consistently strong, this company will do great! Now for the hard part; deciding to buy or not. I need to think about it a little more but I’m pretty sure this could turn out the one I buy. I can only buy one company and I’m beginning to think that MVL deserves being that one company!

I learned a lot writing this and I hope you learned a lot too!

Aaron
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Author: TMFSysun Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2631 of 2674
Subject: Re: Marvel Write-Up Date: 7/17/2009 2:01 PM
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Awesome writeup! You cover a lot of really important points that most people don't consider when they look at a company. This is super impressive.

Just some food for thought, something else to consider about a company's economic moat is, not only "does the moat exist right now" but also "will the moat continue to exist a year from now, two years from now, five, ten? Is there anything the company could accidentally do that would destroy that moat?"

Keep up the great work, I look forward to hearing what your thoughts are!

-sys

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Author: awesomestockdude Big red star, 1000 posts Ticker Guide Supernova Odyssey 1
Mission Team Member CAPS All Star SC1 Red Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2632 of 2674
Subject: Re: Marvel Write-Up Date: 7/17/2009 3:16 PM
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Just some food for thought, something else to consider about a company's economic moat is, not only "does the moat exist right now" but also "will the moat continue to exist a year from now, two years from now, five, ten? Is there anything the company could accidentally do that would destroy that moat?"

Hi Sean! It's awesome to have someone else on this board to keep the conversation running!

Let me answer the questions you brought up. First of all, I believe that they have a moat that will continue in the years to come mostly from a strong brand name. As I said in my write-up, Marvel has over 5,000 characters under its name, so this leaves the company with a whole bunch of possibilities for the future. Of course, not all super heroes would have a big impact and a strong appeal with people, but there are definitely some characters who would. Also, by going into a new market by making movies, this brings in many more advantages, but also more risks. However, I believe that this is a smart move for the company and that they have handled the situation perfectly through The Incredible Hulk and Iron Man. By changing where the business is heading it makes it more difficult to judge their moat, but at least their brand makes things obvious. Over time, as the company matures in this way of business, we will be able to have a better idea of the moat.

And yes, there is always something that could harm a company's moat. The largest thing that would impact Marvel's moat would be if one of their movies bombed. They might be able to live with one bad outcome, but if this consistently starts happening, it would be time to look for other options with your money. Of course there are things that would hurt any successful company such as new management and people taking less interest in the items the company produces. We will just have to be on the lookout for these type issues to arrive.

Currently the price of Marvel is around $40, which is much higher than when I wrote my write-up. I currently have a limit order in at $26.50. I don't know if the price can go down that much, but I have my fingers crossed! After all, there is not much action in the company this year so sales and earnings should fall quite a bit.

Best,

Aaron

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