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With Snoopy film in the works, fund managers bet on Iconix

By David Randall

NEW YORK (Reuters) - Fund managers are making a big bet on Snoopy, Lucy and Charlie Brown.

With a big-budget Peanuts film set to appear in theaters next year, an unusually high number of U.S. mutual funds have been buying shares of Iconix Brand Group Inc, the little-known company that owns 80 percent of the rights to the characters. The number of new funds owning shares swelled 36 percent last quarter, according to data from fund tracker Morningstar. That is a high number for a company with a market value of $1.9 billion and a slowing core business, fund experts say.

Few consumers have ever heard of the New York-based company, though they are likely familiar with its roster of 35 brands, ranging from mass-market staples like Joe Boxer and Ed Hardy to Cannon linens and Material Girl, the line of apparel and accessories from Madonna and her daughter. But with many of its U.S. retail partners, such as Target, Macy's and Sears Holdings Corp, struggling with falling traffic and weak consumer demand, Iconix is looking elsewhere to expand.

"With what is happening in America we don't see large growth there over the next couple of years but we do see stability," Chief Executive Neil Cole, the brother of fashion designer Kenneth Cole, told analysts after the company reported its quarterly results in April.

PEANUTS BRAND

Should the Peanuts movie prove to be a hit, it could help Iconix double its revenues, which hit $433 million in 2013, Cole told analysts. The company declined to comment for this story.

Already, the brand has paid some dividends: Walt Disney Co's ABC network renewed its long-standing contract to air the popular Peanuts holiday specials 18 months before it came due. Iconix recognized $17 million of the $21 million contract in the first quarter, which helped push revenue up 11 percent to $116.1 million and non-diluted adjusted earnings per share to 72 cents, a 33 percent increase from the same time last year.

There is no telling how well the movie will be received, of course. For every hit like "The Lego Movie," which has brought in $256.7 million at the U.S. box office, according to Box Office Mojo, there has been a film like 2013's "The Lone Ranger," whose $89 million in U.S. box-office take paled against an estimated cost of $215 million.

Though the percentage that Iconix could reap from next year's film was not disclosed, the Peanuts brand should command a premium, said Charles W. Grimes, a Norwalk, Connecticut, attorney who specializes in character licensing and has worked with properties including Archie comics and Disney characters. It would "not be inconceivable" for the company to get an upfront fee of $10 million or more for the theatrical release of the film, plus additional fees once the box office draw topped certain milestones, Grimes said.

Iconix would also likely get between 7 and 14 percent of film merchandise tie-ins, such as T-shirts or toys, he said.

Sesame Street Workshop, the non-profit company that owns the license to Elmo and the other Sesame Street characters, made $46.5 million from licensing in the year that ended June 30, 2013, according to its most recent financial statement.

"Peanuts has a huge growth ahead of it," said Cliff Greenberg, who manages $5.5 billion in the Baron Small Cap fund and has been buying shares of Iconix on dips in expectations that it will continue to expand its entertainment division.

Chris Terry, an analyst at Dallas-based Hodges Capital, said his firm began buying shares approximately six months ago on expectations that the Peanuts license will pay off.

RISKS AHEAD

There is caution, however, in some quarters.

The lack of clear numbers regarding Peanut's contribution gives Steve Marotta, an analyst at C.L. King & Associates who covers the stock, pause.

"The company is a bit of black box," he said. He estimates that Peanuts is the most important individual brand to the company, followed by Mossimo and Candie's.

Nevertheless, he has a "buy" rating on the stock, and a target price of $47, slightly above the median target price of $46.50 among analysts tracked by Thomson Reuters.

Shares closed at $42.71 Wednesday, and trade at a forward price to earnings multiple of 15.3, a full point lower than the 16.7 average among apparel companies.

The company now largely depends on overseas licenses for growth and has several joint ventures to sell its brands throughout Asia, Marotta said.

Eric Beder, an analyst at Brean Capital, said he has a "hold" rating because Iconix has not bought any new brands this year after typically adding two or three annually.

"The company doesn’t usually beat by much and usually never misses," he said. "But right now it's a question of finding the right deals and that isn't happening."

(Reporting by David Randall; Editing by Linda Stern and Leslie Adler)

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