Clobberin' Time (MVL)
As the Thing, the Fantastic Four's largest and most orange member, says, "It's Clobberin' Time." Marvel Entertainment (MVL) released earnings this morning and the 2006 earnings forecast was shockingly bad, sending the shares down about 20% immediately.
Ouch.
This is obviously a little surprising, but the fact that their earnings for this past quarter were down from the previous year should not have been at all surprising -- no one expected Fantastic Four to have the same impact as the 2005 megahit Spiderman 2, so the fact that their earnings fell year over year was not surprising, nor was it particularly bad in my opinion. Companies that rely on hits are always going to have choppy earnings.
No, what was really bad was that the first impression is that the company basically wrote off next year entirely. They projected earnings of well under half this year's earnings (in a pretty wide range of 37-52 cents/share, following this year's expected $1.02 a share minimum), saying that licensing and toys revenue will likely be difficult next year.
I expect a large part of the reason for that is that we'll be in a long lull between Spiderman movies, and Spiderman is inarguably the king of the licensing roost -- but still, projecting this kind of dismal earnings for a year in which they're releasing two movies that have pretty high expectations (Ghost Rider with Nicholas Cage, and X-Men 3) seems very unsettling.
Peter Cuneo made it clear in this morning's conference call: "our toy forecasts, frankly, are very low for '06"
What else did we learn from the call?
F4 licensing income is going to be worse than originally expected. Other licensing was frontloaded into this year as they extended or renewed more than usual, especially the video game agreement (with Microsoft? They'll release details on that very soon) which brought in $50 million this year in earnings but should bring in actual cash flow annually. That tradeoff between the video game agreement and F4 licensing is why they made their numbers this quarter and will do so this year.
That also means that cash flow is expected to be much better than earnings next year, according to the call -- $70 million, versus a projected $38-53 million in net income.
Marvel has also authorized a big repurchase in common stock, but they're borrowing to do this. That is a significant commitment to the long-term potential and they certainly believe that this will be immediately accretive to EPS, and I tend to agree with that assessment, but it does concern me a little that they're adding debt to do this repurchase given the substantial debt they're already taking on to produce their own films in 2008 and beyond. Definitely something to keep an eye on.
The key reaction I got from the conference call was "very defensive". Defensive about the potential income from next year's movies, extremely defensive about toy and other licensing income. They seem to be incorporating some extremely pessimistic assumptions about consumers going forward, as well as some extremely conservative projections of the popularity of the X-Men 3 and Ghost Rider toys.
Changes are definitely afoot for Marvel, but they're going to take a few years to develop. The toy license is up for renewal at the end of 2006 -- which means that 2007 will bring some significant changes to one third of Marvel's business, and with the 2008 movies having more significant impact on the bottom line their could be some really dramatic changes to the way we think about Marvel in the coming years.
Avi Arad, head of Marvel Studios, was not very specific in the call but did say that current licensed films are moving forward well (including F4-2 and Spiderman 3), and they are going full speed ahead with the slate of self-produced films for 2008 but will wait to see which looks most promising for first release as scripts and talent are identified.
So what do I do with these MVL shares? I still think their self-produced films can be a huge boost to income, and I still think their slate of films over the next two years should drive better toy and licensing revenue than they're expecting. I appreciate that they have lowballed the projections because they want to be very conservative, but I hope they're aiming high while guiding low.
I'm going to hold the shares that are now sitting at a small loss, and if the market accepts their projections about 2006 performance and continues to beat the stock down, I'll have to reassess and see whether I think buying more shares makes sense. I see at least one blockbuster hit in each of the next two years (Xmen 3 and Spiderman 3) which I think will help drive licensing performance higher, and I'm hoping that the toy problems they've had this year can be resolved and the segment performance will improve. The downside seems awfully limited to me, I see no reason to sell.
Ouch.
This is obviously a little surprising, but the fact that their earnings for this past quarter were down from the previous year should not have been at all surprising -- no one expected Fantastic Four to have the same impact as the 2005 megahit Spiderman 2, so the fact that their earnings fell year over year was not surprising, nor was it particularly bad in my opinion. Companies that rely on hits are always going to have choppy earnings.
No, what was really bad was that the first impression is that the company basically wrote off next year entirely. They projected earnings of well under half this year's earnings (in a pretty wide range of 37-52 cents/share, following this year's expected $1.02 a share minimum), saying that licensing and toys revenue will likely be difficult next year.
I expect a large part of the reason for that is that we'll be in a long lull between Spiderman movies, and Spiderman is inarguably the king of the licensing roost -- but still, projecting this kind of dismal earnings for a year in which they're releasing two movies that have pretty high expectations (Ghost Rider with Nicholas Cage, and X-Men 3) seems very unsettling.
Peter Cuneo made it clear in this morning's conference call: "our toy forecasts, frankly, are very low for '06"
What else did we learn from the call?
F4 licensing income is going to be worse than originally expected. Other licensing was frontloaded into this year as they extended or renewed more than usual, especially the video game agreement (with Microsoft? They'll release details on that very soon) which brought in $50 million this year in earnings but should bring in actual cash flow annually. That tradeoff between the video game agreement and F4 licensing is why they made their numbers this quarter and will do so this year.
That also means that cash flow is expected to be much better than earnings next year, according to the call -- $70 million, versus a projected $38-53 million in net income.
Marvel has also authorized a big repurchase in common stock, but they're borrowing to do this. That is a significant commitment to the long-term potential and they certainly believe that this will be immediately accretive to EPS, and I tend to agree with that assessment, but it does concern me a little that they're adding debt to do this repurchase given the substantial debt they're already taking on to produce their own films in 2008 and beyond. Definitely something to keep an eye on.
The key reaction I got from the conference call was "very defensive". Defensive about the potential income from next year's movies, extremely defensive about toy and other licensing income. They seem to be incorporating some extremely pessimistic assumptions about consumers going forward, as well as some extremely conservative projections of the popularity of the X-Men 3 and Ghost Rider toys.
Changes are definitely afoot for Marvel, but they're going to take a few years to develop. The toy license is up for renewal at the end of 2006 -- which means that 2007 will bring some significant changes to one third of Marvel's business, and with the 2008 movies having more significant impact on the bottom line their could be some really dramatic changes to the way we think about Marvel in the coming years.
Avi Arad, head of Marvel Studios, was not very specific in the call but did say that current licensed films are moving forward well (including F4-2 and Spiderman 3), and they are going full speed ahead with the slate of self-produced films for 2008 but will wait to see which looks most promising for first release as scripts and talent are identified.
So what do I do with these MVL shares? I still think their self-produced films can be a huge boost to income, and I still think their slate of films over the next two years should drive better toy and licensing revenue than they're expecting. I appreciate that they have lowballed the projections because they want to be very conservative, but I hope they're aiming high while guiding low.
I'm going to hold the shares that are now sitting at a small loss, and if the market accepts their projections about 2006 performance and continues to beat the stock down, I'll have to reassess and see whether I think buying more shares makes sense. I see at least one blockbuster hit in each of the next two years (Xmen 3 and Spiderman 3) which I think will help drive licensing performance higher, and I'm hoping that the toy problems they've had this year can be resolved and the segment performance will improve. The downside seems awfully limited to me, I see no reason to sell.
Labels: MVL
This article posted by One Guy @ 11/09/2005 12:38:00 PM 0 comments
Add to: del.icio.us *Furl *Google *Spurl *reddit *StumbleUpon *Yahoo MyWeb *
Add to: del.icio.us *Furl *Google *Spurl *reddit *StumbleUpon *Yahoo MyWeb *
