Disney Hits Jackpot, Dreamworks Fails to Realize Its Dream

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 |  Includes: DIS, DWA, PIXR, VIAB
by: Wall St. Cheat Sheet

by Carolyn Austin

The Shrek franchise looked golden for years to come, but disappointing box office sales for Shrek Forever After moved DreamWorks Animation (DWA) to lower its earnings outlook for this year. DWA’s CFO stated that 2010 Q2 earnings would be “meaningfully below” last year’s Q2 EPS of $0.30 per share and the stock got hit with a downgrade on the news.

DreamWorks main competitor, Pixar (PIXR) has been taking the gold lately, thanks largely to its latest release Toy Story 3 and the man with the Midas touch, Apple’s (Nasdaq: AAPL) Steve Jobs. Jobs’ hot streak continues unabated it seems, but it’s not just luck that accounts for his success – the man is a true visionary. Former CEO Jobs acquired the company in 1986 and produced the critically acclaimed Toy Story shortly thereafter.

Disney (DIS), the world’s largest media conglomerate, then purchased Pixar in 2006 following a contentious distribution deal with the studio, in which Disney retained story and sequel rights to the Pixar-produced films. (These days, Disney cares less for movie-making awards than for marketable franchises that can spawn other business deals worldwide.)

Pixar’s successes include Monsters Inc, Finding Nemo, The Incredibles, Cars, Ratatouille, Wall-E and the academy award-winning Up, among others. Steve Jobs now sits on the board for Walt Disney/Pixar Animation Studios.

DreamWorks’s recent animated feature films include Shrek, Monsters v. Aliens, and How to Train your Dragon. The company’s computer-generated animation films are distributed by Paramount Studios (owned by Viacom (VIA, VIA.B) and headed by Jeffrey Katzenberg, CEO of DreamWorks and former Disney VP.

Analysts speculated that flooding the market with 3-D movies at higher ticket prices put a damper on market demand, which may account for Shrek’s disappointing box office to date. DreamWorks CFO Jim Coleman commented: “I think you have to make a compelling case to have a 3D movie in 3D, like Avatar and Dragon. I don’t think we made that case for Shrek. If we had to do it all over again, we would probably do some things slightly different.”

More likely, it has to do with franchise fatigue, as demonstrated by the invasion of the sequels in what’s turning out to be a disappointing summer 2010 box-office.

DreamWorks Animation (NASDAQ: DWA)

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DWA is currently trading near its 52-week low of 25.80. In its latest earnings report, revenues decreased 38 percent to $162.1M and net income decreased 65 percent to $21.7M. The stock lost about 40 percent of its value since that earnings release and then tanked to below $26.80 when the company revised its outlook. The stock looks slightly undervalued at its current price as the stock has zero debt. The company’s future plans include sequels to Kung Fu Panda, Madagascar, How to Train Your Dragon, and a Shrek offshoot (Puss in Boots). Except for the Shrek franchise, these projects don’t have the critical mass that Pixar’s franchises have. The volatility in this pure-play stock, however, may present a good opportunity.

Disney Co. (NYSE: DIS)

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Disney is golden right now, with the highly-rated Toy Story 3 a big hit at the box office and a series of new video games based on Pixar studios properties-- such Toy Story and Cars. The stock is in an uptrend and closed above its 50-day EMA. Disney pays a small dividend for a 1 percent yield.

In its latest earnings report, DIS revenues increased 4 percent to $18.32B and net income increased 23 percent to $1.8B. With the stock trading at around $35 per share and EPS double that of DreamWorks, Disney looks like a good bet for a long position if you can pick it up in the $33 range.

Disclosure: No positions.