A Covered-Call Trade on Marvel's "Hulk"

6/6 - "Marvel Entertainment (MVL) makes toys, licenses and publishes, and produces films with a portfolio of over 5000 characters. It is responsible for such cultural icons as Spider-Man and The Incredible Hulk. Most people on Earth are familiar with at least a few of these characters."

"The fundamentals are outstanding for the company...Even with the stock price run-up, the shares are changing hands at a little over 19x current-year earnings. This is not expensive for a company that has so much going for it."

"In more good news, it was recently announced that James Breyer, a director at the company, made a purchase of 25,000 shares of the stock...Given all the great news, we see the stock north of $42 in 3-to-6 months.

Suggested Stop: $33.92"

5/5 - "The Superhero business is booming. Marvel Entertainments first self produced movie, Iron Man, dominated the weekend box office earning an estimated $201m in global receipts in its debut. At the same time, on Wall Street, the company didn’t fare badly either. Marvel posted better a better than expected quarter and raised 2008 guidance. These numbers are only a small part of a bigger story."

"On the Street, Marvel reported net income of $45.2m or 58 cents a share. That result beat adjusted analyst expectations of 45 cents a share on revenues of $113.5m. The company also raised sales outlook for the rest of 2008. The lower end of the projected net sales range is now set $370m, up from $360m. Income is forecast in a range of $1.35 to $1.55 a share, up from a range of $1.30 to $1.50."

"The first step in the reinvention was animation. Rather than relying fully on licensing income, Marvel Studios took all creative development and design responsibilities on titles to built around Marvel characters. They contracted out animation duties to third parties and the releases were issued Direct to DVD.

The second part of the plan was the key: film finance and feature production. Rather than licensing characters to the studios and taking a production credit, Marvel would build a true studio of their own. That would allow them to control development, set release schedules, and more importantly, give them the lion’s share of all non-theatrical revenue (DVD sales and rentals, merchandise and toy sales, video games, and TV licensing). The deal also insures Marvel has the films in their own library – a vault from which future revenue streams will come back to them, rather than enriching some other studio."

"Chairman David Maisel told the New York Times more than a year ago: there “[hasn’t] been a new studio making $100 million movies since DreamWorks,” he said. “We’re going Hollywood, but in a smart way.”

That seems, so far, to be accurate."

6/11 - "Despite the massive success of ’Iron Man’, concerns about ’The Incredible Hulk’ have remained a negative for Marvel shares. However, buzz for the movie has improved markedly over the past few weeks, and we now believe that concerns about the box office prospects for ’The Incredible Hulk’ are largely unwarranted. We are raising our domestic box office estimate for the film from $125MM to $150MM, as well as our EPS estimates for FY08E and FY09E. We believe MVL shares can outperform the market by at least 10% over the next 12 months and we rate the shares Outperform."

"One of the factors which impressed us the most about the film at our screening was the degree to which the film ties in to other Marvel properties, such as Iron Man and Captain America. Marvel is clearly building towards its planned ’Avengers’ film in 2011. Additionally, we think the ability to cross-promote characters across films will give Marvel an added edge when introducing new film franchises."

"We are increasing our ’Iron Man’ domestic estimate from $275MM to $300MM based on its performance to-date. The combined effect of the increased box office estimates for the two films is to raise our EPS estimate for FY08E from $1.88 to $1.97 and for FY09E from $2.02 to $2.23."