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Executive Summary:

  • Dreamworks Animation (DWA) still in early process of diversification
  • Offers upside as a miniature version of Disney (DIS)
  • Television segment growing, with revenue doubling from third quarter to fourth quarter
  • Consumer product sales strong
  • Monetizing Classic Media acquisition
  • Strong film slate, with three movies in 2014
  • Theme park revenue beginning to take shape

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"We made significant progress in 2013, transforming and positioning Dreamworks Animation for long-term success as a diversified family entertainment company." This quote came from Jeffrey Katzenberg during Tuesday's fourth quarter earnings presentation. Katzenberg sums up why I believe investors should chase Dreamworks shares after the 9% haircut in after-hours trading, diversification.

Segments other than animated films continue to lead the growth at Dreamworks Animation. In the fourth quarter, television made up $47.1 million of the total $204.3 million reported in revenue. Consumer products brought in $12.4 million in the fourth quarter. Both television and consumer products were led by strong results from the brands acquired from Classic Media. The acquisition of Classic Media, which I highlighted at the initial bidding process, has paid off for Dreamworks Animation and continues to help the company see new revenue sources in both television and licensing.

In the third quarter, television revenue was $18.2 million and was led by Classic Media and "Dragons: Riders of Berk". Consumer revenue was $12.0 million in the third quarter, led by "Turbo" and Classic Media. As you can see, both of these segments had improvements in the fourth quarter, particularly the sharp increase in television revenue, which more than doubled quarter over quarter.

Back in August, I highlighted Dreamworks Animation's push away from film into television and consumer products. This includes an upcoming toy deal with Hasbro (HAS), which could lead to a big partnership going forward if successful.

Another area that is set to boost Dreamworks Animation is theme parks. Similar to Disney, Dreamworks will see its characters as part of theme parks. However, unlike Disney, Dreamworks will license out its popular characters and take in less revenue for less risk of attendance and ticket sales.

Earlier this week, Dreamworks Animation announced a partnership with Merlin Entertainment that will put Shrek and other Dreamworks characters at six attractions over the next nine years. The partnership will begin in London in 2015. This is a big deal for Dreamworks, as Merlin Entertainment is the second largest visitor attraction company in the world, trailing only Disney . The partnership also will see a rotating exhibit of characters that will support theatrical or DVD releases, helping to market upcoming movies. A branded retail outlet at each attraction should help improve consumer product sales and will open up new licensing partnerships down the road.

To follow with one area Disney has also had success with, Dreamworks Animation is launching Press, a new publishing unit. The segment will see books featuring Dreamworks characters hit stores in time for the 2014 holiday season. This unit will capture additional sales for Dreamworks by leveraging strong characters in both digital and print mediums. The unit will be run by Emma Whittard, who has over 18 years experience in kids publishing, including 8 with rival Disney. The unit will also have input from the head of franchise Shawn Dennis, who oversaw publishing for the American Girl brand previously. The Press unit is another way for Dreamworks Animation to capture revenue year round, when movies are not always in theaters.

An upcoming catalyst for Dreamworks Animation could be its new partnered kids tablet. Launched with Fuhu Inc., the DreamTabe features exclusive games and activities with Dreamworks Animation characters. The device also has parental controls, kid safe email, and the ability to set time limits for children. The DreamTab is set to launch in the United States in the spring of 2014, with international expansion coming later in 2014.

In the fourth quarter, film continued to make up the largest percentage. Film revenue totaled $127.9 million, representing 62% of the quarterly total. The film segment was led by "Turbo", "The Croods", "Rise of the Guardians", and "Madagascar 3", which contributed totals of $1.6 million, $59.7 million, $8.5 million, and $11.4 million respectively. Library titles brought in $46.8 million for the fourth quarter.

The 2014 year will be exciting for Dreamworks Animation and shareholders as the company releases three films and also continues its growth in television and licensing. On the 2014 calendar is the theatrical releases of "Mr. Peabody & Sherman", "How to Train Your Dragon 2", and "Home". This could be a big year for Dreamworks' film division. The company only released two movies in 2013 and is now on track to release three movies in each of the next three years.

"Mr. Peabody & Sherman" is a recognized brand and represents part of the reason why Dreamworks purchased Classic Media. "How to Train Your Dragon 2" is the sequel to the overwhelming successful first movie. "How to Train Your Dragon" saw box office gross of $217.6 million in North America and a total of almost $500 million worldwide. The film became the highest grossing non-Shrek title for Dreamworks Animation. With positive reviews of the first film, a built in fan base, a hit television show, and additional international marketing, the sequel should be able to gross between $600 and $700 million worldwide. The first quarter will be led by "Mr. Peabody & Sherman" in theaters, along with the pay television revenue from "The Croods" and "Turbo".

Dreamworks Animation shares come with a lofty price to earnings ratio. Shares are trading at around $30 and Dreamworks is estimated to post earnings per share of $0.90 in fiscal 2014. However, I believe the company can beat these estimates and will come closer to hitting the $1 billion revenue mark (current Yahoo estimate is $855.1 million). The television and consumer sectors are not being fully priced in and any upside from films could cause analysts to revise their estimates.

In my last Dreamworks Animation article, I said, "Dreamworks Animation is a mini-Disney and it is finally starting to act like one." Investing in Dreamworks for simply animated film revenue is over, the time to invest for future growth from television and consumer products is now. It would not be out of the question to see Dreamworks Animation someday having its own branded stores in malls or its own television channel. The similarities and possibilities comparing Dreamworks to Disney offer more upside down the road. Consider buying shares after Tuesday's late decline. The long term trade continue to be there for diversification leading to additional revenue.

Source: Follow Dreamworks Animation As It Becomes The Next Disney