Dream a Little Dream of Gromit (DWA)

OK, so now I have a confession to make. I'm a big Wallace and Gromit fan from way back, I love their short films and I even loved Chicken Run and have a fondness for Aardman's other claymation pics as well.

So I might be a bit biased, and I haven't seen the movie yet. But I'm thinking that Dreamworks Animation (DWA) might do a bit better with this one than the analysts are predicting . SG Cowen just came out and said they see no catalysts until Shrek 3 in 2007, so they see the stock standing for a while, but of course no one thought the first Shrek would be such a big hit until it came out, either. That's the beauty of the entertainment industry, sometimes a little pixie dust comes down and shakes the audience up and creates a hit from whence less was expected. I hold a few entertainment companies in my portfolio, and I last wrote about them in detail when I covered Marvel and Dreamworks a few months ago.

Everyone is predicting that Wallace and Gromit: Curse of the Were Rabbit will do OK here in the US, and do quite well overseas for a modest $150 million or so overall take. I'm thinking that Americans might cotton to this duo with far more gusto than is being predicted and vault it into a pre-holiday "hit for the whole family" -- humor, fun for adults and kids, and brilliant craftsmanship that's old-fashioned enough to hold your interest (not just more special effects, yawn). I'd say that's a good list of ingredients for a possible breakthrough.

Now, I might just be blowing smoke because I like this duo, and I haven't yet seen the film. But it's getting great reviews and I expect the opening weekend to surprise everyone. For those of us invested in Dreamworks Animation who haven't had much to cheer about this summer, we might get to smile a little more in the next few weeks. Track the performance of the film at Box Office Mojo (and by the way, Mojo is pretty good at predicting grosses, but certainly not perfect, and they've got W&G pegged for $15 mil to lead the weekend -- I'll take the over).

Even if this is a pretty big hit as I think it might be, we may see a short-term pop for DWA but it's likely not going to turn things around for DWA in a hurry -- it probably won't become much of a franchise, since part of the magic of these characters is in the painstaking hand animation that has taken Nick Park et al about five years for this one film. Dreamworks is struggling with some other strategic issues just like all the other entertainment content companies are (Lions Gate (LGF) and Pixar, to name a couple -- and I do own and like Lions Gate).

Beyond that, and perhaps most importantly for the bottom line, Dreamworks Animation is really just distributing this film, they don't own all international rights to the content and the characters the way they do with Shrek and the other films that they've developed themselves, so they don't benefit as dramatically as they might for one of their own creations that achieves hit status.

I'm still on the fence about Dreamworks, waiting to see if Katzenberg and his management team can be as effective at managing Wall Street as they are at developing great creative ideas. I expect even the two films next year -- Over the Hedge with Bruce Willis and Gary Shandling, and Flushed Away (also Ardman, but CGI) with Hugh Jackman -- might do quite well. They both have good voice stars and creative new storylines, but there probably won't be much hype in them as they're not part of existing franchises. And there will be lots of competition, too, as Pixar's success combined with the Shrek blockbusters has made almost every studio reconsider big animation projects.

Until the hype of Shrek 3 and Puss in Boots begins pouring on in late 2006 I expect DWA will trade on actual results -- box office, earnings, and, perhaps most importantly given the Shrek 2 fiasco, DVD sales (Madagascar has become a surprisingly big hit -- how about those DVD's this Christmas? Something to watch carefully).

I can live with that, but other than a small possible short-term trade in call options to satisfy my urge to bet on the inventor and his brilliant canine, I'll not be buying or selling anytime soon.