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Marvel Entertainment Inc. (MVL) owns the rights to well recognized characters, including include Spider-man, X-Men, The Incredible Hulk, Daredevil, and The Fantastic Four. The company's business model of leveraging its library of more than 5,000 trademarked and often ubiquitous characters across 3 businesses - comic books, toys and films - while putting little capital at risk has proven lucrative, generating operating margins and ROE [return on equity] averaging 56% and 37%, respectively, from 2003 to the present.
We expect EPS to fall by 58% in 2009, but recover in 2010 to eclipse 2008 levels, driven by the timing of the company's film slate. The newly launched film production unit has performed very well thus far, producing two high grossing films in 2008, 'Iron Man' and 'The Incredible Hulk.' Two films a year are planned for 2010 and beyond, which we think can contribute to high-teens average EPS growth over the long term.
In the meantime, Marvel appears relatively resilient to the recession, with publishing revenues declining just 3% year-over-year in the third quarter, and some weakness in licensing expected, while the film segment's earnings will hinge more on the popularity of its releases rather than the economy, as movies are inexpensive entertainment. Our six-month target price is $31.
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