A Super Forecast from Marvel

The comic-book giant lifted its revenue and profit estimates for 2008, when it will launch its self-produced Iron Man and Hulk films

Superheroes like Iron Man and Spider Man came through in the clutch for Marvel Entertainment (MVL) in the company's latest quarter.

The New York-based company said on Nov. 5 that its third-quarter profit almost tripled to $36.3 million, or 45 cents a share, from $13.2 million, or 16 cents a share, a year ago, mostly due to strong revenue from licensing the worldwide rights to its popular comic-book characters to toy makers and other merchandisers.

Net revenue climbed 34% to $123.6 million from $92.2 million in the prior-year period.

Analysts had expected earnings of 28 cents a share, excluding special items, on revenue of $90.52 million. Wall Street is projecting full-year earnings of $1.44 a share.

While the results were strong, after backing out one-time gains from previous audit settlements, which came to 11 cents a share, and the positive impact of a lower tax rate and a smaller number of outstanding shares, they were pretty much in line with expectations, said Arvind Bhatia, an equities analyst at Sterne Agee & Leach. (Sterne, Agee & Leach, has managed or co-managed a public offering or provided other investment banking services for Marvel within the past 12 months and also makes a market in the company's securities.)

Marvel shares traded 16.2% higher Nov. 5 to close at $27.08.

The stock jumped not because of the third-quarter results but on the company's profit projection for next year, which was higher than most people were expecting, said Joseph Hovorka, an equities analyst at Raymond James & Co. (RJF), who has a strong buy rating on the stock.

Marvel raised its profit estimate for 2007 to between $1.60 and $1.65 a share from a prior range of $1.30 to $1.55 a share and boosted its revenue forecast for this year to between $455 million and $475 million from $375 million to $435 million. For 2008, it expects to earn $130 to $1.50 a share on $360 million to $400 million in revenue, which doesn't include sales or costs related to the release of the Iron Man and The Incredible Hulk films next spring.

Net sales in Marvel's licensing segment more than doubled to $66 million from $28.3 million in the third quarter of 2006, mostly due to continuing effects of a its lucrative Spider-Man merchandising joint venture with Sony Corp. (SNE). Revenue contributed by the joint venture soared to $24.2 million from $800,000 a year ago.

In its publishing segment, net sales rose 13% to $4.0 million, buoyed by ongoing strength in direct and mass market venues and special event publishing such as Stephen King's Dark Tower series. Toy revenues slipped 31% to $22.7 million from $33.0 million a year ago, primarily due to the transition from toys produced by Marvel in 2006 to toys mostly licensed to and produced by Hasbro ((HAS) this year.

There had been some concerns about whether Marvel's toys deal with Hasbro would generate sales that met expectations, given that Marvel now has to wait until toy sales exceed certain levels before it earns royalties, said Bhatia at Sterne Agee, who has a hold rating on the stock. But the toy segment has done well, he added.

The publishing results were better than most people expected because of the bundling together of different editions of comic books and marketing efforts aimed at expanding sales through such mass market venues as Wal-Mart (WMT) and Target (TGT), in addition to specialty venues such as Barnes & Noble, Bhatia said.

Marvel has an opportunity to substantially improve profits with films based on the Iron Man and Incredible Hulk characters, slated for spring 2008 releases. But there are risks, too, since these are the company's first forays into film production.

The films should do very well because of "the popularity of the characters they're doing and the fact that they have 40 years of brand awareness," said Hovorka at Raymond James. "It's not as if they're creating new intellectual property that you're marketing and people have to be told what it is."

The release dates – May 2 for Iron Man and June 13 for The Incredible Hulk – will also be key to the films' success, he believes.

"May 2 is considered the starting weekend for the summer season and is probably one of more coveted release dates in the industry," he said. Films released during that month have, in the past, had some of the best box office takes, he added.

Hovorka expects the films to boost Marvel's profits in 2008 by 30 cents a share. Cowen and Company (COWN) in a Nov. 5 research note, estimated the films would generate roughly $10 million in operating income in fiscal 2008.

During the third quarter, Marvel spent nearly $162 million to buy back about 5.3 million shares of its common stock at an average price of $23.81. It still has $38.1 million remaining under the $200 million share repurchase program authorized in May.

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