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I thought that I would look back at some of my past investments, before I started my blog and before I began to journal the investment thesis for purchases I make, and document some of my reasons for the purchase, and the outcome. Of course I’m working on an outcome bias here, but I think it’s worth writing out some history lessons that I should keep in mind as I look for future businesses to invest in the future. The first look back will be one of the best investment returns I have made by investing in Marvel Enterprises in the early 2000’s.
I believe that everyone is familiar with Marvel Studios and the many movies that have been released over the past decade involving many of the Marvel superheroes. The company is now a division of Disney, but at one point in time they were a public company and even declared bankruptcy. That may be shocking since the current situation is going very well for Marvel Studios, especially with the recent release of Deadpool. I’ll admit, I love finding turnaround companies and think the outcome can be very profitable if the right situation lends itself in the market. Many celebrity stock investors have warned people about turnarounds, and how they rarely turnaround, and I believe this myself. However, I still like to look for the right situations for success and believe the returns justify the “diamond in the rough” search. I’m going to cover my investment in Marvel as an example of a turnaround story stock that returned a lot of money to investors that stuck with their investment for a period of several years. The main point is to try and identify situations where a future opportunity presents itself, and learn from past successes in order to gain an advantage in the future.
Finding the right turnaround stock can be highly profitable as I found with $MVL Click To TweetMarvel Entertainment Group was incorporated in 1986 as the parent of Marvel Comics and Marvel Productions which purchased the assets from the liquidation of the former parent organization. Marvel then bounced around and into Ron Perelman’s hands in 1989, who brought the company public in 1991 with the ticker $MRV. The company was not well managed and had to enter chapter 11 bankruptcy protection at the end of 1996. New management took the business over during bankruptcy, and a new strategic plan was put into place to divest of non-core assets in order to right-size the business and exit bankruptcy in 1999 with the ticker $MVL. It was during this time that the new management team made many strategically important decisions that shaped the new business model going forward for which I was able to take advantage of with my investment a few years after the exit from bankruptcy.
The comic and toy business were two of the Marvel assets that contained most of the future value as a going concern. The comic business wasn’t going to be a huge revenue growth engine, but that library of characters and stories from the comic business was worth a lot of money. The toy business was also valuable due to the recognition of superheroes among kids was very high, and toys are a great extension to the comic business. So, during bankruptcy the new management implemented three core strategies
- Sell unprofitable businesses – divest non-core assets
- Cut costs – right size the existing business
- Keep the Comic and Toy businesses (Core Assets) and begin to license content for movies of which Men in Black and Blade were the first two licensing deals
The new business model included the decision to license the Marvel comic/superhero content to studios in order to bring the characters to the big screen, in addition to, licensing and manufacturing toys to coincide with the movie release. The eventual licensing deal for the Spiderman movie rights to Sony was the first licensing deal that Marvel was to receive a percentage of gross receipts at the box office plus a percentage of the valuable home video and DVD sales. Not only was Marvel to receive a percentage of the BO receipts, but it received a large cash advance to jointly develop and market Spiderman toys and other products with Sony. I purchased my first shares of $MVL a little after the first release of the Spiderman movie in 2002.
I believed that the turnaround had a high likelihood of succeeding because the company had new management with a clear strategy for profitable growth, a very strong core asset (content) that was not being valued to its potential and finally, the company had a long runway for growth. The initial licensing agreements were not in favor of Marvel Enterprises as the studios and distributors took much of the profit. I can remember many individuals use this situation as an example to warn investors that Marvel wasn’t a good investment. The initial Spiderman movie brought in huge revenue numbers, but Marvel didn’t realize a significant amount of that revenue but it was still a success for Marvel. The company, with new management, was still in the very beginning of the turnaround, and with each movie success allowed Marvel to be in a better negotiating position for future licensing deals. The situation was perfect for the intelligent investor with a long term investment timeframe because he/she could see the value of the new business build as new movies were made. Marvel was making a percentage of the gross receipts, and also making money from toy sales that coincided with the movie releases. The new business model was very profitable, as it didn’t require much capital investment from Marvel as most licensing agreements are highly profitable. Over the year 2002 and into 2003 I made several more purchases of stock as the story was very strong, the company was executing, and I didn’t think the market was valuing the future for Marvel properly. My initial purchases were in the low $2’s with additional purchases through $7.50 or so. A lot of information surrounding Marvel is on the Internet including Wikipedia, so I won’t include the full history but instead will highlight a few relevant items. Because the Marvel superhero movies were so successful at the box office, Marvel was able to better negotiate future licensing deals and ultimately were able to finance movies themselves in order to receive an even higher percentage of the profits. The first movie that Marvel financed was Iron Man which was released in 2008 and had a $100 million opening weekend. In 2009, Disney purchased Marvel for $4 Billion in cash and stock in the form of $30 in cash and .745 shares of Disney for each Marvel share. At the announcement of the deal it was a payout of about $50 per share for Marvel shareholders. The company was valued at ~$300 million when I first began purchasing shares in the company.
In summary, most turnaround situations are very difficult and do not work out financially, but if the right situation does arise it can be very profitable. Marvel Enterprises was a great turnaround story/situation as they had a very strong asset in the comic book business and many well-known characters and stories that could be leveraged. In addition to the strong asset, it could be monetized in a highly profitable fashion requiring small investments in order to build increasing sales. The return on capital was extremely high for the licensing business, and Marvel had many stories and characters to last many years. If you have read the book “Good to Great” by Jim Collins, he discusses the concept of the flywheel. After the exit from bankruptcy in the late 1990’s, the flywheel began to turn slowly, and built momentum throughout the years as management made good business and capital allocation decisions. The momentum kept growing until Disney purchased the company.
Image provide by Wikipedia Commons – Marvel.com
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