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Summary

  • How to Train Your Dragon performing well overseas, market has overreacted to number two debut weekend.
  • Strong television revenue and slate of upcoming Netflix shows.
  • New details from China joint venture show potential live action films.

Shares of Dreamworks Animation (NASDAQ:DWA) continue to trade down after a weaker than expected box office opening for its animated title "How to Train Your Dragon 2". The slight disappointment in box office revenue, seems like a drastic overreaction by Wall Street. With strong international performance coming and other revenue outlets, Dreamworks Animation shares remain undervalued.

"How to Train Your Dragon 2" was filmed with a production budget of $145 million. The movie finished in second place during its opening weekend. However, the second place finish is actually not as unimpressive as it sounds. The movie grossed $49.5 million during its opening weekend in North America. This was second behind another sequel released the same weekend, "22 Jump Street", which grossed $57.1 million. The second place finish was the eighth highest non number one open in the United States.

The first "How to Train Your Dragon" movie grossed $494.9 million worldwide. In the United States, "How to Train Your Dragon" grossed $217.6 million. The first film opened with a first weekend total of $43.7 million. The movie went on to be the fifth highest grossing Dreamworks Animation title, trailing only the four Shrek movies.

"How to Train Your Dragon 2" was released in 28 new markets this past weekend and saw strong results. The movie had $43.5 million in additional international box office revenue. Despite the ongoing World Cup, the movie was the second biggest animated open ever in Brazil with $6.8 million. In Mexico, the movie saw $7.3 million from over 2400 screens. In 30 different countries, the movie was number one over the weekend. The movie has now grossed $77.2 million in international territories, with the majority of Europe still to come.

As you can see there might have been a slight overreaction to the box office performance of "How to Train Your Dragon 2". Later in 2014, Dreamworks Animation will also release "Penguins of Madagascar". The next four years each have three scheduled movie releases in the United States, with sequels and originals mixed in.

Dreamworks Animation's big announcement last week was a deal to acquire the Felix the Cat brand. Unveiled at the Licensing Expo, Dreamworks Animation announced it was acquiring the brand to transform its consumer product division. Dreamworks Animation wants to make the 95 year old character "one of the most desired fashion brands in the world".

Now whether or not Felix the Cat goes on to become as big as the $5 billion annual Hello Kitty brand remains unseen. However, this deal could be the start of Dreamworks Animation further pushing into consumer products and licensing. Iconix Brands has had success with its Peanuts ownership stake and Dreamworks could be doing the same here. In 2012, Dreamworks Animation acquired Classic Media, which gave the company the rights to old "Felix the Cat" television episodes. Now, Dreamworks has full ownership of media rights and licensing.

To go along with the November release of "Penguins of Madagascar", Dreamworks Animation could have a strong holiday season. The company unveiled its plans to launch the Dreamworks Dreamhouse Christmas exhibit at malls across the country.

The 2000 square foot attraction will feature Shrek and other Dreamworks characters in a 42 foot tall cottage with Santa. "It will be hosted by our characters and will include a thrilling four-minute flight on Santa's sleigh to visit the big guy in his home at the North Pole," the company said.

Dreamworks Animation also has a joint venture with three Chinese companies, which is helping with international box office. The company recently updated investors on its upcoming slate of Chinese movies:

· Untitled historical period epic, screenplay by Wang Huiling of "Crouching Tiger, Hidden Dragon" fame

· Animated feature based on classic Chinese folk tale, to be directed by Teng Hua Tao

· English language version of "Journey to the West"

Of these three, the adaptation of "Journey to the West" is the most intriguing, in my opinion. The movie grossed $215 million worldwide and became the highest grossing Chinese film ever. This movie could be a big deal for the joint venture. Keep in mind that Dreamworks Animation owns a 45% stake in the venture. With its partners, Dreamworks Animation will see its first entry into live action movies as well.

One of the biggest catalysts to watch with Dreamworks Animation continues to be its television series. The company has had success taking some of its movie characters and putting them on the small screen for channels like Cartoon Network and Nickelodeon. A deal with Netflix (NASDAQ:NFLX) to create 300 hours of original content is starting to come to fruition.

Dreamworks Animation recently announced it would be adapting the award winning "Dinotrux" children's book series into a Netflix original series. The show will feature hybrid dinosaur construction characters. The show will debut in Spring of 2015 on Netflix. I see this show being well received and also could be turned into a movie or a huge toy line.

In 2014, Dreamworks Animation will debut television shows based on King Julien, Puss in Boots and Veggie Tales for Netflix. In 2015, it will debut both Dinotrux and a How to Train Your Dragon show. Television revenue was $17.9 million in the first quarter, of the company's total $147.2 million. The company cited the strong performance of "Riders of the Berk" on Cartoon Network. The television segment saw a first quarter profit of $5.8 million.

The first quarter wasn't a stellar one for Dreamworks Animation as the company reported a loss of $0.51 per share. The company posted revenue of $147.2 million. The big issue was a write down of $57 million from the poor performance of "Mr. Peabody and Sherman". While movies wasn't a strong point for the company, its other units performed well.

Television, as mentioned above was a bright spot with $17.9 million in revenue. Consumer products saw revenue of $12.1 million, with a profit of $6.0 million. The company's other segment posted revenue of $7.1 million, with its recently acquired AwesomenessTV posting revenue of $4.1 million. I recently highlighted Dreamworks Animation and its diversification efforts as it becomes a mini-Disney. The catalysts listed above further strengthen that position and belief.

Shares of Dreamworks Animation trade at around $24. This is getting very close to 52 week lows of $22.81. Shares of the company are now down 30% in 2014. This is a company that saw its stock trading over $40 as recently as 2010 and over $35 just last December. Analysts see revenue growing 13% in the current fiscal year and growing 26% in fiscal 2015. Use this stock price weakness as a buying opportunity to once again invest in the future of a diversified Dreamworks Animation.

Source: Dreamworks Animation: Felix The Cat, Santa, Netflix, And China All Upcoming Catalysts