Dreamworks Animation Scores Big With New Netflix Deal

| About: Dreamworks Animation (DWA)

Shares of movie animation studio Dreamworks Animation (NASDAQ:DWA) shot up 5% on Monday. The rise came from news of an extended original content deal with Netflix (NASDAQ:NFLX), the movie rental and streaming giant. Despite approaching a new 52-week high, shares are still undervalued.

Netflix announced its largest original content deal in company history. The deal will bring over 300 hours of new programming in a move seen to strengthen Netflix's kids segment. Netflix chose to let its Viacom (NYSE:VIA) deal expire earlier in the year, losing shows from Nickelodeon, like "Dora the Explorer" and "Spongebob Squarepants." With the new deal, Netflix will now have leading animated shows and movies from Dreamworks Animation and Disney (NYSE:DIS).

Back in February, Netflix and Dreamworks Animation announced a smaller deal. Dreamworks Animation is bringing the original television show "Turbo F.A.S.T." to Netflix. The show is based on Dreamworks Animation's upcoming movie "Turbo," which will hit theaters on July 17th.

The new Netflix deal also gives the streaming giant exclusive rights to "The Croods", "Turbo" and "Mr. Peabody and Sherman" next year. Dreamworks Animation CEO Jeffrey Katzenberg was pleased with the deal and added the following: "This is an unprecedented commitment to original content in the internet television space. Netflix is a visionary company that continues to redefine the way audiences watch television and it is a thrill to add to their growing momentum."

In an article titled "Can Netflix save Dreamworks Animation?" I discussed the possibilities of the deal from the Dreamworks side. This is what I had to say at the time:

· "The partnership with Netflix gives the studio's movies life after the big screen and will also help turn sequels into bigger box office results. The show will also air in the United States and 39 other countries, which could help the international box office numbers of future Dreamworks releases. The following year should be big for Dreamworks with the new television deal and three movie releases. Long-term investors should start accumulating shares."

Since that article, shares are up 36.5%. For the calendar year, shares of Dreamworks Animation are up 46%.

The new deal from Netflix will also help Dreamworks Animation monetize its recent acquisition of Classic Media. Dreamworks paid $155 million for a library of characters that includes He-Man, Casper, Waldo, and Rocky & Bullwinkle. The new Netflix deal will give them some of the old animated shows of these characters and will also help Dreamworks license out these strong brands.

Despite being known as a movie company, Dreamworks Animation has the ability to shift into television and compete with larger rivals like Disney. The company has a smaller library, but holds valuable characters that have proven successful on the small screen format. Drewamworks Animation has these current television shows on air:

· "Penguins of Madagascar" (Nickelodeon)

· "Kung Fu Panda: Legends of Awesomeness" (Nickelodeon)

· "Dragons: Riders of Berk" (Cartoon Network)

· "Monsters vs. Aliens" (Nickelodeon)

Along with television, Dreamworks Animation has also released short animated movies with DVD releases. The company has also had numerous television specials like: "Shrek the Halls," "Merry Madagascar" and "Kung Fu Panda Holiday."

Television has been a segment that Katzenberg and Dreamworks Animation have wanted to get into for awhile. Back in April of 2012, I discussed the possibility of a standalone television channel.

During a call, Chief Executive Officer Jeffrey Katzenbeg said that there is, "idea of a Dreamworks branded channel whether that's a digital channel or cable or otherwise domestically, internationally." The new television channel would be a place to showcase Dreamworks Animations animated movies and also its recent television series. Dreamworks has also likely seen this as a possibility thanks to its acquisition of Classic Media.

The announcement from Netflix and Dreamworks Animation comes at a key time for the animation company. Dreamworks had a mediocre year in 2012 with strong results from "Madagascar 3" but a disappointing release of "Rise of the Guardians." The latter movie led to a huge write-down and also led Dreamworks to a net loss of $0.43 in fiscal 2012.

Earlier in 2013, Netflix released the surprise hit "The Croods." The stone age themed movie grossed $182.7 million domestically and $393.4 million in international markets. The total box office of $576.1 million was a huge success for the company and should help produce a strong fiscal year. "Turbo" will be the only other 2013 theatrical release. For the third straight year, Dreamworks Animation will only release two movies this year. This means the company relies even more on library and television deal revenue.

By adding this new deal with Netflix, Dreamworks Animation will rely less on the box office success of one movie. The disappointment of one movie ("Rise of the Guardians") led the strong animation company to post a full year loss, which led many investors to the exit door.

Going forward, Dreamworks Animation has a strong three movie per year schedule, which along with new television and consumer licensing deals should rapidly boost revenue and earnings. Here is the current release schedule for 2014 and 2015:

· 2014: "Mr. Peabody and Sherman," "How to Train Your Dragon 2," "Home"

· 2015: "The Penguins of Madagascar," "B.O.O.: Bureau of Otherworldy Operations," "Kung Fu Panda 3"

Analysts remain only slightly bullish on Dreamworks Animation going forward. The company is expected to post revenue of $762.4 million for fiscal 2013. This represents only a 1.7% increase from the mediocre fiscal 2012 year. In fiscal 2014, analysts expect Dreamworks to boost revenue 6.1% to $808.8 million. With the new television deal from Netflix, and a strong lineup of future films, Dreamworks Animation should post closer to double digit revenue gains in fiscal 2014.

The undervalued play with the Netflix deal is licensing and consumer products. Consider that if Netflix airs old episodes of television shows based on Capser, He-Man, Waldo, and Rocky and Bullwinkle, that sales of those characters will heat up. Five years ago, shares of Dreamworks Animation were 21% higher because of the success of the Shrek franchise. With Shrek being one of the rumored new original shows, new licensing deals around the company's strongest brand will once again start popping up. Similar to other animation giants like Disney, Dreamworks Animation will realize the strength of its brands through licensing deals.

Dreamworks will have a press release after Tuesday's market close to further discuss details. Expect more news to come out with the company's earnings on July 29th. In the meantime, consider opening a long position on this powerful brand company that is beginning to see the value of its content monetized.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DWA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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