Marvel Enterprises (MVL) and
Dreamworks Animation (DWA)
Marvel bought January 20, 2005 at $17.31 and
April 28, 2005 at 19.74
Dreamworks bought March 28, 2005 at $38.78 and
May 10, 2005 at $31
This seemed like an interesting pair to write up today, since the Fantastic Four opening weekend was such a nice surprise for many and the evil twin of Marvel lately, Dreamworks Animation, continues to plummet -- first on bad sales projections, then on the SEC investigation and inept guidance. The charts of these two companies appeared to be almost mirror images on Monday of this week (you can see what I mean on a comparison chart from Yahoo here). I'm also invested in a third company in this space, Lions Gate Films, but that one seems quite separate from the first two and is certainly following a different strategy and inhabiting a differerent space on the cultural landscape.
My investment thesis for these two investments is basically this: ownership of great intellectual property in entertainment is a potential cash cow. Both of these companies stand to build great libraries of films and enjoy very high margin licensing deals with the next generation of entertainment products, whether it's video games, toys, television, or otherwise. This industry is inherently high risk, but I don't think it's as risky as the box office watchers would have you believe while they judge both of these companies by the performance of a single character in a single film on a single weekend.
Marvel, as most probably know, is a comic book company that has been through financial chaos and become reborn as an intellectual property and toy vendor that licenses its universe of characters out to films, video games, etc., and also sells comic books.
Dreamworks Animation is the stepchild of Dreamworks SKG, the powerhouse studio put together more than ten years ago with Spielberg, Katzenberg and Geffen and that has done well for itself in film and television. The animation division went public last fall, following the blockbuster Shrek 2 and trying to ride Pixar's stock market coattails, and it has seen some troubled times this year, to say the least. DWA also relies on its own intellectual property, creating films that hopefully inspire kids to bring their parents, buy the licensed toys, and take home the DVD a few months later to watch over and over and over again.
Marvel first.
I haven't seen F4 yet, but I'd like to and it sounds like the fun, squabbling, family angst came through nicely in this iteration of the film, along with lots of explosions and all that other good Summer movie stuff. But I would have been fine with holding this stock long term even if this one film was a disappointment on opening night.
Marvel is a personally interesting stock for me, as well as one that I think is a good long term financial holding. I grew up reading X-Men and Spiderman comics, and I am pleased to see these iconic characters finally being well managed and turned into entertainment franchises in films, DVD, television, toys and video games as well as the traditional comic book publishing that defined the company for much of its life during the past golden ages of comic books.
While I think the comic book as a mass market product will never be what it was in terms of a financial engine for the company or a culturally important media, I do think that the stories told visually in comic books translate very effectively into newer media forms, especially movies and interactive entertainment like video games, and I think Marvel's focus on creating a multimedia universe inhabited by its characters, both large and small, will lead to great success.
Marvel's recovery from the financial maelstrom of Ron Perelman et al is now complete, with a solid balance sheet and cash flow, and an increasingly well-managed revenue stream from licensing deals, publishing (which still makes good money from all the aging fans like me), and movies. The time to buy most recently was probably last summer when the stock remained in the low teens even after the success of Spiderman 2, but I think it's still a good buy at this price -- they had two iffy releases in the cineplexes in the last year in Blade 3 and Elektra, but they still made money on those movies.
Marvel has been very successful in recent years because of their ability to license out proprietary characters to Hollywood and collect a small portion of the proceeds at little or no risk. That makes them a good steady investment even if some of the movies are flops, as long as enough of them still do well enough to keep the movie studios interested in making more. But that's where the story gets interesting.
You see, this model -- which served them well, and gave me some comfort in holding the stock long term -- is being modified in the coming years. Marvel will still license out their characters and stories for films, games and other content, but they're also going to start participating in the riskier end of the business by financing and producing their own films.
As any good investor knows, one generally gets more rewards if you're willing to take on more risk. I think that's the case with Marvel's move into producing their own films, and in this case I think it's coming at the perfect time and their financing deals are structured brilliantly -- as I read the initial releases on this, the company doesn't go bust if they default on their financing deals due to failed films, they just lose the collateral. And the collateral is the characters themselves -- so you could argue that this is still fairly low risk. If Marvel makes a great movie with Captain America using this deal, they collect windfall profits from being the primary producers of the film. If the movie is a stupendous flop and all else is also going poorly for Marvel and they can't pay the bills, they lose the movie rights to Captain America as the collateral they put up for the financing. So in that case, the collateral they're losing -- future Captain America movies -- is already damaged goods, having been proven in the marketplace to be a flop. No great loss.
Of course, that's a simplification of the deal that Marvel has struck with Paramount and their backers who will fund the films, but the point basically stands: Marvel's creations are so valuable, even this second tier of Captain America, Nick Fury, Thor et al., that they are good enough to be their own guarantee of a movie's success. We don't know much in the way of details at the moment about how much the financing will cost Marvel, which is certainly an area for careful attention and concern because the last time MVL was circling the bowl it was due to financial mismanagement and a huge debt burden, but that information should be coming soon and I think Marvel is in a good position to get reasonable terms from its backers going forward.
I also really like this deal because it gives creative control back to Marvel for the next wave of comic characters to enter the multiplex. That is, after all, their specialty, and they have reared these characters and stories from infancy into an entire universe of interacting heroes and villains -- since the early days of Stan Lee, Marvel has always known that it's not about cool suits and crazy superpowers, it's about effective storytelling and great characters. If Marvel can continue developing great stories instead of having to stand by and watch while their characters (a la Elektra) are mangled on film, even if to some profit, I think great films and future success are on the way.
And this way, even if the studios lose interest in superhero or comic book movies, Marvel can make them on their own and show that a good story and a great character can always find an audience. And hey, even if superhero movies go out of vogue for a brief time, there's more to comic books than superheros -- even after allowing for the broad range of stories from Batman (not Marvel) to Fantastic Four to Thor to the X-Men, there's more. Ghost Rider, most definitely not a superhero, will be riding into theaters with Nick Cage soon, and you never know what other great stories lurk in the vaults that spawned Men in Black (a Marvel property, though they acquired it by purchasing a small comic book company).
I am holding on to this one at least until they've released their first film on their own in 2007 (if all goes according to plan). I do have faith in management's performance at MVL, much more so than at Dreamworks, so I will consider adding to my position if one-time events -- like a bad opening weekend -- create buying opportunities.
There are other risks, too, that everyone should be aware of. Management could tire of the turnaround and quit ... people could lose interest in superheroes entirely ... they could have a string of mediocre marquee movies like the Hulk and Daredevil. I personally discount those risks, but they're worth investigating.
And one fear that many people note is that "all the good characters are taken" with Hulk, Spiderman, Fantastic Four and the X-Men all already out there and building libraries of sequels. I disagree -- even if the next wave of characters are less a part of the cultural landsape today than these big three are, success will come to many of them as good stories are told about the most promising of the other 5,000 characters in the library. Not every successful movie has to come with an audience that already knows the characters well from another media -- Shrek shows the lie in that (though it was a somewhat successful children's book, I doubt most most of the moviegoers knew that), as does the original Star Wars, or Raiders of the Lost Ark, Finding Nemo, Men in Black, the Incredibles, Ghostbusters or many other films that came to the screen unknown to their audiences and made the list of the top 100 grossing films of all time (as well as being, many of them, great merchandising successes, which is also key for Marvel).
and as for Dreamworks ...
Most people seem to agree that Dreamworks Animation stock is quite a dissapointment these days. This seems to be a story of merchandising inexperience more than anything else, since their actual films have been, with some missteps, strong successes since the first Shrek debuted a couple of years ago. They have proven that they can create mega-blockbuster films, but they haven't proven that they can effectively manage the DVD supply chain or Wall Street's expectations game.
The expectations management of DWA is something that should be easily fixed -- it is nearly a Wall Street mantra, and it's certainly a cliche, that companies must underpromise and overdeliver. Dreamworks has failed on three fronts lately with this, first predicting blockbuster results for the Shrek 2 DVD that failed to materialize (even though the DVD sales were huge), then predicting a blockbuster in the theaters with Madagascar (which was merely a big success, not a blowout blockbuster in theaters like Shrek 2), and finally revising their earnings downward yet again just a few days ago. Each of these problems would have been improved if conservative guidance had been given, an clearly Dreamworks management needs to learn the difference between creative promotion and hucksterism, which works great for the films, and honest and conservative information sharing, which works great for stocks.
In all fairness, the DVD concern is the same issue that's giving fits to all the movie studios lately. Pixar got a haircut a couple weeks back when they warned that Incredibles DVD's were likely to be returned from stores in greater numbers than expected, the same problem that hit Shrek 2 DVDs over the winter, and everywhere you turn there are articles about the demise of the DVD as Hollywood's cash cow.
I don't believe it. Some bad merchandising and poor demand estimates don't make for a sick industry. Home video and home entertainment are both growth industries -- what else are people going to do with their 85-inch plasma televisions? Watching quality films at home is the preference of most of the American public, and films that are aimed at kids, as all of Dreamworks' and much of Marvel's fare is, are destined to be watched multiple times by young eyes that crave repetition, which means purchases are likely.
The new efficiency in the retail marketplace, where retailers return unsold crates of DVDs if they haven't sold out in their first two weeks, is a wild swing away from past practice. I expect the experts are right on this, that it will depress some DVD sales of blockbusters, but that should be well within the power of DWA (and Pixar, for that matter), to manage. The problem was not that Shrek 2 didn't sell in DVD, the problem was that they shipped more than they could sell, and those returns ate all the
profits they might have otherwise seen from what were extremely strong sales by any other comparison. New techniques, stronger management, and marketing will evolve, and this stock market pummeling should scare DWA into making sure that they really get it right from here forward.
From my perspective, Mr. Katzenberg needs some help on the management front (and they need to stop providing quarterly guidance at all, in my opinion, if they're to be so inept at guessing). I am confident that the big holders of DWA stock, including Paul Allen who would like to sell some of his holdings, will closely watch performance going forward, as will I.
I think the value folks who bought DWA based on their trailing PE of 6 or 7 (now down to 5) are likely to be selling now, even as I'm thinking that Dreamworks goes on sale and might now become more of a long-term value. I look forward to this fall's Wallace and Gromit feature and next year's Over the Hedge and Flushed Away, neither of which comes with much cachet and could provide some upside surprise, but the real blockbusters will follow as the Shrek franchise returns with Shrek 3 and Puss in Boots, and Seinfeld's first animated feature, Bees, comes to the theaters.
My holdings are underwater now on this one, and I'm not planning to buy more this fall as I think it may continue to trend lower without a blockbuster performance from Wallace and Gromit, but I'm going to continue to hold as long as I see signs of management improvement.
What would make me sell?
Continued inept management. I'll give them a year from now, which will include two theatrical releases. If they don't improve by then I'll consider selling -- and by improve I mean manage expectations better, and manage the DVD sales and licensing revenue to increase margins between now and next summer. The films don't have to be blockbusters for me to hold, but their releases and subsequent DVD releases and merchandising have to be successful to the extent that management can control that (with Marvel and DWA both, I consider one or two creative mistakes to be possible buying opportunities. Not so with management mistakes).
There are lots of folks who disagree with me, of course, and they may well be right. The DVD may be dead. Piracy may destroy the intellectual property that is these firms' primary asset. I think both risks are overstated, but that's just me. I expect it's just as likely that I'll be enjoying Spiderman 5 and Shrek 4 in a few years on my new HDTV with the next generation of High Def DVDs.
Technorati tags: Marvel, Dreamworks, DWA, MVL, DVD
Dreamworks Animation (DWA)
Marvel bought January 20, 2005 at $17.31 and
April 28, 2005 at 19.74
Dreamworks bought March 28, 2005 at $38.78 and
May 10, 2005 at $31
This seemed like an interesting pair to write up today, since the Fantastic Four opening weekend was such a nice surprise for many and the evil twin of Marvel lately, Dreamworks Animation, continues to plummet -- first on bad sales projections, then on the SEC investigation and inept guidance. The charts of these two companies appeared to be almost mirror images on Monday of this week (you can see what I mean on a comparison chart from Yahoo here). I'm also invested in a third company in this space, Lions Gate Films, but that one seems quite separate from the first two and is certainly following a different strategy and inhabiting a differerent space on the cultural landscape.
My investment thesis for these two investments is basically this: ownership of great intellectual property in entertainment is a potential cash cow. Both of these companies stand to build great libraries of films and enjoy very high margin licensing deals with the next generation of entertainment products, whether it's video games, toys, television, or otherwise. This industry is inherently high risk, but I don't think it's as risky as the box office watchers would have you believe while they judge both of these companies by the performance of a single character in a single film on a single weekend.
Marvel, as most probably know, is a comic book company that has been through financial chaos and become reborn as an intellectual property and toy vendor that licenses its universe of characters out to films, video games, etc., and also sells comic books.
Dreamworks Animation is the stepchild of Dreamworks SKG, the powerhouse studio put together more than ten years ago with Spielberg, Katzenberg and Geffen and that has done well for itself in film and television. The animation division went public last fall, following the blockbuster Shrek 2 and trying to ride Pixar's stock market coattails, and it has seen some troubled times this year, to say the least. DWA also relies on its own intellectual property, creating films that hopefully inspire kids to bring their parents, buy the licensed toys, and take home the DVD a few months later to watch over and over and over again.
Marvel first.
I haven't seen F4 yet, but I'd like to and it sounds like the fun, squabbling, family angst came through nicely in this iteration of the film, along with lots of explosions and all that other good Summer movie stuff. But I would have been fine with holding this stock long term even if this one film was a disappointment on opening night.
Marvel is a personally interesting stock for me, as well as one that I think is a good long term financial holding. I grew up reading X-Men and Spiderman comics, and I am pleased to see these iconic characters finally being well managed and turned into entertainment franchises in films, DVD, television, toys and video games as well as the traditional comic book publishing that defined the company for much of its life during the past golden ages of comic books.
While I think the comic book as a mass market product will never be what it was in terms of a financial engine for the company or a culturally important media, I do think that the stories told visually in comic books translate very effectively into newer media forms, especially movies and interactive entertainment like video games, and I think Marvel's focus on creating a multimedia universe inhabited by its characters, both large and small, will lead to great success.
Marvel's recovery from the financial maelstrom of Ron Perelman et al is now complete, with a solid balance sheet and cash flow, and an increasingly well-managed revenue stream from licensing deals, publishing (which still makes good money from all the aging fans like me), and movies. The time to buy most recently was probably last summer when the stock remained in the low teens even after the success of Spiderman 2, but I think it's still a good buy at this price -- they had two iffy releases in the cineplexes in the last year in Blade 3 and Elektra, but they still made money on those movies.
Marvel has been very successful in recent years because of their ability to license out proprietary characters to Hollywood and collect a small portion of the proceeds at little or no risk. That makes them a good steady investment even if some of the movies are flops, as long as enough of them still do well enough to keep the movie studios interested in making more. But that's where the story gets interesting.
You see, this model -- which served them well, and gave me some comfort in holding the stock long term -- is being modified in the coming years. Marvel will still license out their characters and stories for films, games and other content, but they're also going to start participating in the riskier end of the business by financing and producing their own films.
As any good investor knows, one generally gets more rewards if you're willing to take on more risk. I think that's the case with Marvel's move into producing their own films, and in this case I think it's coming at the perfect time and their financing deals are structured brilliantly -- as I read the initial releases on this, the company doesn't go bust if they default on their financing deals due to failed films, they just lose the collateral. And the collateral is the characters themselves -- so you could argue that this is still fairly low risk. If Marvel makes a great movie with Captain America using this deal, they collect windfall profits from being the primary producers of the film. If the movie is a stupendous flop and all else is also going poorly for Marvel and they can't pay the bills, they lose the movie rights to Captain America as the collateral they put up for the financing. So in that case, the collateral they're losing -- future Captain America movies -- is already damaged goods, having been proven in the marketplace to be a flop. No great loss.
Of course, that's a simplification of the deal that Marvel has struck with Paramount and their backers who will fund the films, but the point basically stands: Marvel's creations are so valuable, even this second tier of Captain America, Nick Fury, Thor et al., that they are good enough to be their own guarantee of a movie's success. We don't know much in the way of details at the moment about how much the financing will cost Marvel, which is certainly an area for careful attention and concern because the last time MVL was circling the bowl it was due to financial mismanagement and a huge debt burden, but that information should be coming soon and I think Marvel is in a good position to get reasonable terms from its backers going forward.
I also really like this deal because it gives creative control back to Marvel for the next wave of comic characters to enter the multiplex. That is, after all, their specialty, and they have reared these characters and stories from infancy into an entire universe of interacting heroes and villains -- since the early days of Stan Lee, Marvel has always known that it's not about cool suits and crazy superpowers, it's about effective storytelling and great characters. If Marvel can continue developing great stories instead of having to stand by and watch while their characters (a la Elektra) are mangled on film, even if to some profit, I think great films and future success are on the way.
And this way, even if the studios lose interest in superhero or comic book movies, Marvel can make them on their own and show that a good story and a great character can always find an audience. And hey, even if superhero movies go out of vogue for a brief time, there's more to comic books than superheros -- even after allowing for the broad range of stories from Batman (not Marvel) to Fantastic Four to Thor to the X-Men, there's more. Ghost Rider, most definitely not a superhero, will be riding into theaters with Nick Cage soon, and you never know what other great stories lurk in the vaults that spawned Men in Black (a Marvel property, though they acquired it by purchasing a small comic book company).
I am holding on to this one at least until they've released their first film on their own in 2007 (if all goes according to plan). I do have faith in management's performance at MVL, much more so than at Dreamworks, so I will consider adding to my position if one-time events -- like a bad opening weekend -- create buying opportunities.
There are other risks, too, that everyone should be aware of. Management could tire of the turnaround and quit ... people could lose interest in superheroes entirely ... they could have a string of mediocre marquee movies like the Hulk and Daredevil. I personally discount those risks, but they're worth investigating.
And one fear that many people note is that "all the good characters are taken" with Hulk, Spiderman, Fantastic Four and the X-Men all already out there and building libraries of sequels. I disagree -- even if the next wave of characters are less a part of the cultural landsape today than these big three are, success will come to many of them as good stories are told about the most promising of the other 5,000 characters in the library. Not every successful movie has to come with an audience that already knows the characters well from another media -- Shrek shows the lie in that (though it was a somewhat successful children's book, I doubt most most of the moviegoers knew that), as does the original Star Wars, or Raiders of the Lost Ark, Finding Nemo, Men in Black, the Incredibles, Ghostbusters or many other films that came to the screen unknown to their audiences and made the list of the top 100 grossing films of all time (as well as being, many of them, great merchandising successes, which is also key for Marvel).
and as for Dreamworks ...
Most people seem to agree that Dreamworks Animation stock is quite a dissapointment these days. This seems to be a story of merchandising inexperience more than anything else, since their actual films have been, with some missteps, strong successes since the first Shrek debuted a couple of years ago. They have proven that they can create mega-blockbuster films, but they haven't proven that they can effectively manage the DVD supply chain or Wall Street's expectations game.
The expectations management of DWA is something that should be easily fixed -- it is nearly a Wall Street mantra, and it's certainly a cliche, that companies must underpromise and overdeliver. Dreamworks has failed on three fronts lately with this, first predicting blockbuster results for the Shrek 2 DVD that failed to materialize (even though the DVD sales were huge), then predicting a blockbuster in the theaters with Madagascar (which was merely a big success, not a blowout blockbuster in theaters like Shrek 2), and finally revising their earnings downward yet again just a few days ago. Each of these problems would have been improved if conservative guidance had been given, an clearly Dreamworks management needs to learn the difference between creative promotion and hucksterism, which works great for the films, and honest and conservative information sharing, which works great for stocks.
In all fairness, the DVD concern is the same issue that's giving fits to all the movie studios lately. Pixar got a haircut a couple weeks back when they warned that Incredibles DVD's were likely to be returned from stores in greater numbers than expected, the same problem that hit Shrek 2 DVDs over the winter, and everywhere you turn there are articles about the demise of the DVD as Hollywood's cash cow.
I don't believe it. Some bad merchandising and poor demand estimates don't make for a sick industry. Home video and home entertainment are both growth industries -- what else are people going to do with their 85-inch plasma televisions? Watching quality films at home is the preference of most of the American public, and films that are aimed at kids, as all of Dreamworks' and much of Marvel's fare is, are destined to be watched multiple times by young eyes that crave repetition, which means purchases are likely.
The new efficiency in the retail marketplace, where retailers return unsold crates of DVDs if they haven't sold out in their first two weeks, is a wild swing away from past practice. I expect the experts are right on this, that it will depress some DVD sales of blockbusters, but that should be well within the power of DWA (and Pixar, for that matter), to manage. The problem was not that Shrek 2 didn't sell in DVD, the problem was that they shipped more than they could sell, and those returns ate all the
profits they might have otherwise seen from what were extremely strong sales by any other comparison. New techniques, stronger management, and marketing will evolve, and this stock market pummeling should scare DWA into making sure that they really get it right from here forward.
From my perspective, Mr. Katzenberg needs some help on the management front (and they need to stop providing quarterly guidance at all, in my opinion, if they're to be so inept at guessing). I am confident that the big holders of DWA stock, including Paul Allen who would like to sell some of his holdings, will closely watch performance going forward, as will I.
I think the value folks who bought DWA based on their trailing PE of 6 or 7 (now down to 5) are likely to be selling now, even as I'm thinking that Dreamworks goes on sale and might now become more of a long-term value. I look forward to this fall's Wallace and Gromit feature and next year's Over the Hedge and Flushed Away, neither of which comes with much cachet and could provide some upside surprise, but the real blockbusters will follow as the Shrek franchise returns with Shrek 3 and Puss in Boots, and Seinfeld's first animated feature, Bees, comes to the theaters.
My holdings are underwater now on this one, and I'm not planning to buy more this fall as I think it may continue to trend lower without a blockbuster performance from Wallace and Gromit, but I'm going to continue to hold as long as I see signs of management improvement.
What would make me sell?
Continued inept management. I'll give them a year from now, which will include two theatrical releases. If they don't improve by then I'll consider selling -- and by improve I mean manage expectations better, and manage the DVD sales and licensing revenue to increase margins between now and next summer. The films don't have to be blockbusters for me to hold, but their releases and subsequent DVD releases and merchandising have to be successful to the extent that management can control that (with Marvel and DWA both, I consider one or two creative mistakes to be possible buying opportunities. Not so with management mistakes).
There are lots of folks who disagree with me, of course, and they may well be right. The DVD may be dead. Piracy may destroy the intellectual property that is these firms' primary asset. I think both risks are overstated, but that's just me. I expect it's just as likely that I'll be enjoying Spiderman 5 and Shrek 4 in a few years on my new HDTV with the next generation of High Def DVDs.
Technorati tags: Marvel, Dreamworks, DWA, MVL, DVD
This article posted by One Guy @ 7/13/2005 10:56:00 AM 0 comments
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