SmartMoney.com.....Article
It's a Marvel-ous Night for a Moondance
Friday June 6, 6:02 pm ET
By Jack Hough
The Rationale:
What's going on with the market? This time last year, an investor who said he'd noticed big growth would have been cautioned to get it checked by a doctor. Now everyone's making money.
The Dow was up about a skajillion points this week (OK, 212), ending the week above 9000. And the Standard & Poor's 500 is moving in on 1000. We haven't seen those levels since last July. Volume's up, new highs are up, and that guy in your office is telling everyone at the water cooler how he just knew his shares of blah-blah-blah were ripe for a move.
While we at SmartMoney.com like to take a conservative approach to things like stock valuations, today we're going to run right at the highfliers and see what all the fuss is about. And more important, we'll try to determine whether there's still money to be made.
The Recipe:
We used our stock-screening tool to narrow our database of 8,300 stocks down to those that are covered by at least two analysts, but not more than five. Why's that? Two gives us the minimum needed for an earnings consensus, and staying under five means our candidates aren't yet household names.
We also required that survivors' sales have increased by more than 20% over the past year, and that five-year earnings-growth expectations are greater than 20% a year. Return on equity, a measure of how efficiently management uses company resources, had to be greater than 20%. Finally, we required a rise in share prices over the past 52 weeks, and low indebtedness. (For all of the details, see our recipe on the top right of this page.) Just nine stocks cleared our sky-high hurdles.
The Results:
What's green and strong and, when angered, capable of smashing through cars with its bare fists?
If you guessed Martha Stewart wearing a homemade avocado-citrus facial mask, we'll give you half credit. But we were looking for everyone's favorite gamma-mutated rage-aholic, the Incredible Hulk.
Marvel Enterprises' (NYSE:MVL - News) muscled menace will be growling his way to your neighborhood Cineplex on June 20. And Marvel says it's already seeing some green: While the company doesn't break down licensing revenues separately, it recently noted that sales of "Hulk" trinkets through Toy Biz Worldwide, its main licensee, are strong.
If you want to track the stock's chart, you'd better get a sherpa and an oxygen mask, because shares have climbed a Himalayan 367% in the past 52 weeks. Now, you're no doubt already familiar with some of the company's recent box-office heroes, like "Spiderman" (released May 2002; ticket sales since then, $403 million), "X2: X-Men United" (May 2003; $200 million and counting) and "Daredevil" (February 2003; $102 million). But we'd like to introduce you to some brand-new characters that were recently presented in Marvel's May 6 first-quarter earnings report:
Consensus Crusader, capable of hurtling 21 cents beyond the 36-cent Reuters Research first-quarter consensus.
Marginator. The puny 6.1% average profit margin of the Standard & Poor's 500 is no match for Marginator's superhuman 47% first-quarter margin. Profit of $41 million was up from a year-earlier loss of $8 million, on sales of $87 million, up 53% year-over-year.
Revisa, master in the art of boosting projections. Eyewitnesses say that during the earnings report Revisa moved 2003 revenue guidance to $225 million to $230 million, from $215 million to $220 million, and earnings guidance to $74 million to $82 million from $50 million to $54 million.
Realizing that Marvel's real strength lies in its intellectual properties, management last year began exiting the business of making things, like toys and merchandise, and focusing more on the company's lucrative thinking-things-up segment. More than 57% of first-quarter revenues came from licensing, including video games ($49.9 million, up 444% year-over-year), with 26% coming from Toy Biz ($22.3 million, down 34%) and the remaining 17% from publishing ($15.2 million, up 4%). The drop in toys was expected because of a tough comparison with "Spiderman" sales last year, and also a labeling shift that now has some toy sales under the licensing column.
OK, that's enough praise for Marvel's great numbers. Wait — did we mention that it pared its debt down to $51 million from $163 million during the past year? OK, we're done. Because there's really only one question that needs answering here: Is it too late to get in now?
The stock trades at more than 23 times the Reuters Research 2003 earnings consensus of $1.15 a share, compared with...well, you pick: The toy group trades at a 2003 P/E of 17, movie-production companies average around 37 and video-game makers are up near 39. Marvel earns money by creating ideas for all of these industries.
One thing we can compare Marvel's P/E to, though, is the company's long-term earnings-growth projection of 22.5% per year. That makes the stock's price/earnings growth, or PEG, ratio (P/E over earnings-growth rate) just over 1.0 — not quite a steal, but far cheaper than the S&P 500's PEG of 1.6.
This stock could be worth paying up for, particularly if shares back off a few points from their recent run. And they might do just that later in the year. After all, 2003 income will clearly be front-loaded, thanks to a perfect storm of revenues hitting in the first quarter.
One hiccup in Marvel's story is that the company has just finished spending down its tax credits, and analysts say its effective rate will probably rise to 16% in 2004 from 4% this year. But that doesn't seem to be a big deal, especially when weighed against the good news: 2004 brings "The Punisher," "Spiderman 2," "Iron Fist," "Fantastic Four" and "Blade 3" to theaters, and all of their corresponding video games to your local toy store. |
