SATELLITE, CABLE & BROADCASTING David B. Kestenbaum 212-218-3851 dkestenbaum@morganjoseph.com Company Update / Estimates Change February 24, 2006 Key Metrics MVL - NYSE $17.34 Pricing Date 02/23/2006 Price Target NA 52-Week Range $22.87-$13.83 Shares Outstanding (mm) 97.1 Market Capitalization ($mm) $1,683.7 3-Mo Average Daily Volume 792,540 Institutional Ownership 73% Debt/Total Capital NM ROE 7.2% Book Value/Share $3.58 Price/Book 4.8x Dividend Yield NM LTM EBITDA Margin NM EPS($) FY: December Prior Curr. Prior Curr. 2005A 2006E 2006E 2007E 2007E 1Q-Mar 0.25 -- 0.14E -- -- 2Q-Jun 0.24 -- 0.17E -- -- 3Q-Sep 0.23 -- 0.17E -- -- 4Q-Dec 0.26 -- 0.10E -- -- FY 0.97 0.56E 0.57E 1.53E 1.17E P/E 17.9x 30.4x 14.8x Revenue($mm) Prior Curr. Prior Curr. 2005A 2006E 2006E 2007E 2007E 1Q-Mar 104.1 -- 76.3E -- -- 2Q-Jun 88.1 -- 90.8E -- -- 3Q-Sep 81.1 -- 91.7E -- -- 4Q-Dec 117.1 -- 77.3E -- -- FY 390.5 307.4E 335.9E -- 473.8E 1 Year Price History for MVL Q1 Q2 Q3 2006 Created by BlueMatrix Company Description: Marvel Entertainment, Inc. (www.marvel.com) is a character-based entertainment company that distributes its licensed content, toys, and published content worldwide. Marvel licenses its library of over 5,000 characters (including Spider-Man, X-Men, The Incredible Hulk, Blade, Captain America, and The Fantastic Four) for use in toys, games, apparel, footwear, and other novelties. Marvel publishes comic books, develops its own line of toys, and uses its character library in the creation, production, and distribution of feature films and DVDs. 24 21 18 15 12 9 Marvel Entertainment, Inc. Rating: Hold Reports 4Q05; 2006 a Holding Pattern Until 2007; Raising Estimates; Hold Investment Highlights: 4Q05 earnings report shows some signs of life, points to transition in 2006. Revenues of $117.1mm and EPS of $0.26 were roughly in-line with our estimates of $120.5mm and $0.36 ($0.24 after adjusting for the $12.5mm charge). Marvel also reported EBITDA of $45.3mm compared to our estimate of $61.7mm ($49.2mm after adjusting for the charge). While progress in Marvel's toy business and 2007 theatrical release schedule strength are encouraging, 2006 will be a transitional year. The company expects 2006 revenues to decline sharply from 2005 levels at $320.0mm-$350.0mm, net income of $38.0mm-$53.0mm, and EPS of $0.44-$0.55. We expect 2007 to be a solid year for Marvel films, not 2006. The company plans to release its third X-Men film in 2006, but has pushed back Ghost Rider to February 2007. In 2007, Marvel now plans to release Ghost Rider, Spider-Man 3, and Fantastic Four 2. We believe these three films will allow the company to successfully capitalize on the high profile nature of these characters to drive significant licensing and toy revenue growth. Marvel's toy business is in a year of transition. Marvel recently terminated its master toy licensing agreement with ToyBiz to bring production in-house for 2006. Marvel's subsequent signing of a five-year agreement with Hasbro (HAS - $20.44 - NYSE) beginning in 2007 gives Marvel access to a partner with the needed worldwide clout for its toy business. In addition, it provides Marvel with a total of $205.0mm in royalties -- $100.0mm upfront, $70.0mm payable on the release of Spider-Man 3, and $35.0mm payable on the release of Spider-Man 4. Buyback points to underlying financial strength. We believe Marvel has been aggressive in buying back shares. Marvel purchased 6.9mm shares in 4Q05 for $113.0mm and said that it has purchased an additional 5.1mm shares in 1Q06 for a total of $47.7mm. We believe this indicates management's confidence in the company's financial performance, its solid cash flow, and low debt position. Raising full year 2006 estimates slightly based on updated guidance. Our 1Q06 revenue and EPS estimates are $76.3mm and $0.14, while our EBITDA estimate is $27.2mm. For the full year 2006, our revenue and EBITDA estimates move to $335.9mm and $115.9mm from $307.4mm and $102.1mm, while our EPS projection moves to $0.57 from $0.56. Maintaining our Hold rating based on our belief that 2006 remains a year in transition. The Disclosure section may be found on pages 5-6 of this report. The Valuation section may be found on page 5 of this report.
This morning's Marvel 4Q05 earnings report shows some signs of life, but points to a transitional year in 2006. Revenues of $117.1mm and EPS of $0.26 were roughly in-line with our estimates of $120.5mm and $0.36 ($0.24 after adjusting for a $12.5mm charge in 4Q05 related to the ToyBiz contract termination). Marvel also reported EBITDA of $45.3mm compared to our estimate of $61.7mm ($49.2mm after adjusting for the ToyBiz charge). While we are encouraged by the progress the company is making in its toy business and with its theatrical release schedule, we believe Marvel is going through a transitional year which may keep shares range bound in the near-term. For 2006, the company's guidance points to some positive impact on the top-line due to the company's move of its master toy license in-house following its termination of the Toy Biz agreement while the bottom line boost is due to the impact of share repurchases. Net income guidance remains unchanged as the increased toy revenues will carry higher sales and marketing costs. The company said revenues in 2006 should decline sharply from 2005 levels, and now expects revenues of $320.0mm-$350.0mm (compared to $270.0mm-$300.0mm previously), net income of $38.0mm-$53.0mm, and EPS of $0.44-$0.55 (compared to $0.37-$0.52 previously). We expect 2007 to be the solid year for Marvel films, not 2006. The company plans to release its third X-Men film in 2006, which we believe will be a very successful theatrical release. However, we believe the lack of solid merchandising behind the film will limit its overall boost to Marvel's results. In addition, the company has pushed back its anticipated launch of Ghost Rider to President's Day weekend in 2007 from summer 2006 because the film is not yet completed and because the theatrical release schedule for summer 2006 is already crowded with a number of significant launches, including Mission: Impossible 3, X-Men: The Last Stand, Superman Returns, Pirates of the Caribbean: Dead Man's Chest, and Miami Vice, among others. Marvel believes that the film will still perform very well at the box office, but does not want this important film to be overshadowed by these other high-profile projects. In 2007, Marvel now plans to release Ghost Rider, Spider-Man 3, and Fantastic Four 2. We believe these three film projects will allow the company to successfully capitalize on the high profile nature of these characters to drive significant licensing and toy revenue growth. Marvel's toy business is in a year of transition with Hasbro coming in 2007. On January 9, 2006, Marvel terminated its master toy licensing agreement with ToyBiz and announced its plans to bring toy production in-house. This move caused Marvel to take a $12.5mm charge in 4Q05. For 2006, Marvel will have complete in-house control of its toy business, which should add to revenues but also drive related costs higher. On the same day, Marvel announced a five-year master toy license agreement with Hasbro for toy and game rights to its over 5,000 characters beginning in 2007. The agreement guarantees the company a total of $205.0mm in royalties -- $100.0mm payable upfront, $70.0mm payable on the release of Spider-Man 3, and $35.0mm payable on the release of Spider-Man 4. We believe this move makes strategic sense for Marvel and gives it access to a partner with worldwide clout in the toy business and gives Hasbro access to Marvel's unrivaled character library. In addition, we believe Marvel will see some nominal boost from sales of Curious George toys as the animated television series is released in 2H06, ahead of the 2006 holiday shopping season. Continuing share buyback points to underlying financial strength. We believe Marvel has been particularly aggressive in pursuing its buyback of shares under the $250.0mm board authorized plan. Marvel purchased 6.9mm shares in the quarter for a total of $113.0mm and said that it also purchased an additional 5.1mm shares in 1Q06 through February 22 for a total of $47.7mm. In 2005, Marvel purchased 16.2mm total shares for approximately $304.5mm in cash. We believe the company's ongoing willingness to continue purchasing its shares in the open market indicates the board's and management's confidence in the company's financial performance, its solid cash flow, and its low debt position. In addition, we believe the addition of the Hasbro arrangement, which will bring the company $100.0mm in pre-tax cash flow in 2006 combined with the 2 MORGAN JOSEPH & CO. INC.
solid slate of theatrical releases set for 2007, should put the company in a solid financial position over the next two years. We are raising our 2006 estimates slightly based on updated guidance. We are also introducing quarterly estimates for 2006. Our 1Q06 revenue and EPS estimates are now $76.3mm and $0.14 while our EBITDA estimate is now $27.2mm. For the full year 2006, our revenue and EBITDA estimates move to $335.9mm and $115.9mm from $307.4mm and $102.1mm while EPS moves to $0.57 from $0.56. 3 MORGAN JOSEPH & CO. INC.
Quarterly and Annual Income Statements 2004-2007E ($ in millions) 1Q04 2Q04 3Q04 4Q04 2004 1Q05 2Q05 3Q05 4Q05E 2005E 1Q06E 2Q06E 3Q06E 4Q06E 2006E 2007E Total Revenues $122.3 $155.5 $135.2 $100.5 $513.5 $104.1 $88.1 $81.1 $117.1 $390.5 $76.3 $90.8 $91.7 $77.3 $335.9 $473.8 Yr/Yr Change in Revenue 40.0% 72.8% 59.9% 17.2% 47.7% -14.9% -43.3% -40.0% 16.5% -24.0% -26.8% 3.0% 13.0% -34.0% -14.0% 41.1% Qtr/Qtr Change in Revenue 42.7% 27.1% -13.1% -25.7% NA 3.6% -15.4% -8.0% 44.3% NA -34.9% 19.0% 1.0% -15.7% NA NA Gross Profit $81.8 $92.6 $96.9 $82.6 $353.9 $91.8 $77.0 $67.0 $104.1 $340.0 $62.1 $75.3 $75.7 $62.2 $275.3 $415.7 Gross Margin 66.9% 59.5% 71.7% 82.2% 68.9% 88.2% 87.4% 82.6% 88.9% 87.1% 81.5% 82.9% 82.6% 80.5% 82.0% 87.7% Total SG&A Expenses $32.1 $30.0 $34.9 $45.8 $142.8 $43.7 $33.2 $30.7 $58.9 $166.5 $34.9 $43.6 $43.8 $37.2 $159.4 $205.5 EBITDA $49.7 $62.6 $61.9 $36.8 $211.1 $48.1 $43.8 $36.3 $45.3 $173.5 $27.2 $31.7 $32.0 $25.0 $115.9 $210.2 % of Revenues 40.6% 40.3% 45.8% 36.7% 41.1% 46.2% 49.7% 44.8% 38.7% 44.4% 35.7% 35.0% 34.9% 32.3% 34.5% 44.4% Change in EBITDA Yr./Yr. -2.0% 50.5% 48.3% 46.2% 32.5% -3.1% -30.0% -41.3% 22.9% -17.8% -43.4% -27.6% -12.0% -44.8% -33.2% 81.4% Depreciation and Amortization $0.7 $0.8 $1.4 $0.9 $3.8 $1.0 $1.1 $1.2 $1.2 $4.5 $1.2 $1.2 $1.2 $1.2 $4.8 $4.9 Equity in net income of joint venture 8.1 0.0 0.0 0.0 8.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other Income, net 0.3 1.8 1.6 5.4 9.0 0.8 0.4 0.2 0.7 2.2 0.6 0.6 0.6 0.7 2.5 3.0 Operating Income (expense) $57.3 $63.6 $62.1 $41.3 $224.4 $48.0 $43.1 $35.4 $44.8 $171.2 $26.6 $31.1 $31.4 $24.5 $113.6 $202.3 Operating Margin 46.9% 40.9% 46.0% 41.1% 43.7% 46.0% 48.9% 43.6% 38.2% 43.8% 34.9% 34.3% 34.2% 31.7% 33.8% 42.7% Interest (Expense),net (3.9) (15.0) 0.6 0.8 (17.5) 1.2 1.4 (0.4) (2.3) (0.1) (2.5) (2.8) (4.0) (7.0) (16.3) (20.0) Pretax Income $53.4 $48.6 $62.7 $42.1 $206.9 $49.1 $44.5 $35.0 $42.5 $171.1 $24.1 $28.3 $27.4 $17.5 $97.3 $187.1 Income Tax (22.1) (15.7) (21.5) (5.4) (64.6) (18.9) (17.1) (11.2) (15.7) (62.8) (8.9) (10.5) (10.1) (6.5) (35.0) (71.1) Net Income $31.3 $33.0 $41.2 $36.8 $142.3 $30.3 $27.4 $23.8 $26.8 $108.2 $15.2 $17.8 $17.2 $11.0 $62.3 $116.0 Other Misc. Items 0.0 (3.8) (6.9) (6.7) (17.4) (2.5) (1.6) (0.4) (0.9) (5.4) (2.0) (2.0) (2.0) (2.0) (8.0) (8.0) Net income(loss) $31.3 $29.1 $34.4 $30.1 $124.9 $27.7 $25.8 $23.4 $25.9 $102.8 $13.2 $15.8 $15.2 $9.0 $54.3 $108.0 EPS (weighted average) $0.29 $0.27 $0.32 $0.29 $1.17 $0.27 $0.25 $0.24 $0.27 $1.03 $0.14 $0.17 $0.17 $0.10 $0.59 $1.20 EPS (fully diluted) ($) $0.27 $0.25 $0.30 $0.27 $1.10 $0.25 $0.24 $0.23 $0.26 $0.97 $0.14 $0.17 $0.17 $0.10 $0.57 $1.17 EPS Growth -26.2% -11.0% -46.7% -38.6% -44.9% -8.4% -6.5% -25.1% -4.2% -11.6% -45.1% -28.1% -26.2% -60.8% -40.7% 103.1% Shares (weighted average) 108.4 108.6 107.1 104.6 107.2 104.6 102.7 96.6 94.6 99.6 92.6 91.6 89.6 87.6 90.4 90.4 Shares (fully diluted) 115.1 115.5 113.5 111.8 114.0 111.2 109.4 103.2 100.5 106.1 96.5 93.5 91.0 89.0 92.5 92.5 Source: Company Reports and Morgan Joseph & Co. Inc. estimates 4 MORGAN JOSEPH & CO. INC.
Required Disclosures Rating and Price Target History for: Marvel Entertainment, Inc. (MVL) as of 02-23-2006 10/18/05 Buy:$21 11/09/05 Hold:NA 24 20 16 12 8 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 2004 2005 2006 4 Created by BlueMatrix Valuation Methodology Maintaining our Hold rating based on our belief that 2006 remains a year in transition. While we are encouraged by the signs of life out of Marvel in the 2007 time frame, we believe there remains some chance that shares stay range-bound in the near term as higher toy costs and a relatively weak 2006 film slate weigh on shares. As a result, we are maintaining our Hold rating. I, David Kestenbaum, the author of this research report, certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. intends to seek or expects to receive compensation for investment banking services from the subject company within the next three months. Investment Banking Services/Past 12 Mos. Rating Percent Percent BUY [B] HOLD [H] SELL [S] 53.12 45.31 1.56 14.71 10.34 0.00 Meaning of Ratings A) Buy means reasonable outperformance relative to the market over 12-18 months. B) Hold means market-type risk adjusted performance; potential source of funds. C) Sell means expected to underperform the market. Other Disclosures The information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not considered to be all inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned herein. Morgan Joseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of their families, may have a position in the securities 5 MORGAN JOSEPH & CO. INC.
mentioned herein, and, before or after your receipt of this report, may make or recommend purchases and/or sales for their own accounts or for the accounts of other customers of the Firm from time to time in the open market or otherwise. Opinions expressed are our present opinions only and are subject to change without notice. Morgan Joseph & Co. Inc. is under no obligation to provide updates to the opinions or information provided herein. Additional information is available upon request. Copyright 2006 by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. 600 Fifth Avenue, 19th Fl New York, NY 10020 Tel. 212.218.3700 Fax. 212.218.3789 Sales and Trading New York Tel. 212.218.3767 Fax. 212.218.3705 Pittsford Tel. 877.237.6542 Fax. 585.899.6029 6 MORGAN JOSEPH & CO. INC.