Tuesday, June 17, 1997

The Harvey Entertainment Co.
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Phone: 310-789-1990
http://www.harvey.com
Phone: 954-267-3000
Price (6/17/97): $13 3/4

HOW DID IT DOUBLE?

Casper the Friendly Ghost has returned from the dead, and Harvey shareholders are getting Richie Rich as a result, with Harvey shares flying as high as $14 1/4 from a January low of $5 1/4.

Harvey Entertainment Co. is in the business of getting entertainment giants to help revive its once well-known cartoon characters so that they generate licensing and merchandising revenues a la Mickey Mouse. Universal Pictures' live action film Casper (1995) has taken in over $300 million in sales and created Harvey's first new entertainment franchise.

In January, the company announced a master toy licensing agreement with Trendmasters (of Tarzan fame). February saw the signing of a new marketing pact with Universal. March saw Casper (broadcast on Fox Kids Network) rated the top children's animated series on TV, leading to a new order for 26 additional episodes for a total of 52. Meanwhile, the animated series Richie Rich is now in syndication and a direct-to-video feature will be ready next year, following up on the recent Warner Brothers film featuring the character.

This string of good news came to a head on May 19 when Harvey announced that it would return to profitability in the second quarter (after losing $0.05 per share in the first quarter), thanks to Universal's decision to join up with Steven Spielberg's Amblin Entertainment to make a live-action Casper sequel. The company also said the third and fourth quarters should be profitable due to next fall's direct-to-video release by Fox Home Entertainment of the animated Casper, A Spirited Beginning.

BUSINESS DESCRIPTION

Based in Los Angeles, Harvey Entertainment was formed in 1989 to acquire and exploit the entertainment properties of Harvey Comics, Inc., a firm founded in 1939 that had developed an assortment of characters during the golden age of comic books. These trademarked characters include Casper; the Ghostly Trio of Fatso, Stinkie and Stretch; Richie Rich; Baby Huey; Wendy, the Good Little Witch; and others. The company owns a digitized and restored film library of 274 color cartoon shorts plus 1875 32-page comic books, now being marketed by Marvel Entertainment.

Harvey essentially licenses its characters to other companies, which then develop new entertainment properties around them. Harvey takes an up-front fee plus a percent of profits after a certain threshold has been reached. The company has recently started its own merchandising division.

FINANCIAL FACTS

Income Statement

      12-month sales: $8.6 million
      12-month income: $0.6 million
      12-month EPS: $0.16
      Profit Margin: 7%
      Market Cap: $49.5 million

      Balance Sheet
      Cash: $4.6 million
      Current Assets: $8.4 million
      Current Liabilities: $0.9 million
      Long-term Debt: N/A

      Ratios
      Price-to-earnings: 85.9
      Price-to-sales: 5.8

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Harvey's revenues are erratic since its is dependent on new licensing deals. The ebbing revenues last year following the successful re-launch of Casper and Richie Rich were not as crucial as the success of the TV series and whether or not Universal continued its relationship with the company. The international success of Universal's 1995 film made a Casper sequel likely.

At $5 1/4 a share (or about $19 million for a company with at least one proven franchise and $6 million in cash), Harvey could have looked like an interesting speculation, particularly with FY97 earnings estimated to hit $0.55 per share. Investors might have been alerted to this opportunity in January when the board authorized the repurchase of 10% of the company's shares.

WHERE TO FROM HERE?

So far, Harvey has been successful in reviving Casper and appears to be working some alchemy with Richie Rich as well. That said, neither franchise has reached the point of bringing in a steady flow of licensing and merchandising revenues. The firm's decision to beef up its internal merchandising and character development staffs may pay off in the long run but add to administrative costs in the short term. Plus, it seems unlikely that the company's other characters have anywhere near as much life in them as Casper does.

The one analyst's earnings estimate of $0.55 per share for FY97 looks stale given the recent news releases. Still, the uncertainties that haunt the company make predicting earnings a guessing game. Although the company's brands have been enhanced since January, it's hard to tell if its business has improved enough to justify the current price.

-Louis Corrigan ([email protected])

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