DreamWorks Animation Should Ride Shrek 3 To Growth

Dreamworks Animation SKG (DWA) produces computer animated features -- including the box office hits Antz, Shrek, and the record-breaking Shrek 2 (the highest-grossing animated film ever until last weekend with the arrival of Shrek 3, which will most likely break that record). DreamWorks Animation develops content that is distributed and marketed by Paramount Pictures. DreamWorks Animation previously released films in collaboration with Aardman Animations, including Chicken Run (2000), Wallace & Gromit: Curse of the Were-Rabbit (which won the Oscar for Best Animated Feature in 2005), and Flushed Away (2006). The partnership ended in 2007.

Dreamworks is looking dreamy at the moment. Shrek 3 just hit theatres and hit them hard, grossing $122 million in its first weekend. That breaks the record for an animation opening, set by Shrek 2 which took in $108 million in its first weekend. How it does in the second weekend will be more telling. Shrek 2 saw a 33% drop in sales on its second weekend.

Shrek is the king at DWA, no matter what he's doing in the movie. Not only is this the third story featuring the loveable ogre, it's also the beginning of other Shrek oriented events. ABC will broadcast a Shrek special this holiday season entitled "Shrek The Halls". There are plans for a Broadway musical, most likely debuting in 2008. Then there are product tie-ins, notably the new promotion by McDonald's restaurants called "Go For Green" where kids are encouraged to eat salads and more healthy meals.

Dreamworks is dreaming up plenty of projects. Jerry Seinfeld's new release Bee Movie (coming in November to a theatre near you) was promoted heavily at Cannes this year with Jerry floating down in a bee costume on guided wires. Since this is the comedian's first major movie project, attendance from the TV series faithful is expected to be strong. Other movies in the works: Ben Stiller's superhero comedy Mastermind, Jack Black's Kung Fu Panda (2008) and Chris Rock in Madagascar Sequel. That's a full pipeline for a company that wants to release 2 films a year.

How does all this translate into revenues and sales? Revenues are expected to be $705 million this year, up from $394.8 million last year. Most likely they'll drop next year to $650 million since Shrek 3 is such a runaway hit. Earnings this year are expected to be $1.85, up from 15 cents last year. Look for $1.55 next year.

Other numbers to consider: Current assets are almost 18 times current liabilities with more than $500 million in cash. Return on equity was 1.5% last year with forecasts for 15.5% this year and 11.5% next year. Debt is 15% of the capital structure. Officers and directors own 60% of the stock with institutions owning 30% of the Class A stock.

This is the company that Steven Spielberg, Jeffrey Katzenberg, and David Geffen started in 1996 as DreamWorks. This division, the Animation group, was spun off in 2004. Since the stock started trading in late 2004, it has gone mostly down, getting to a low of $20 a share last year. Now things are starting to turn for the better, revenues are way up and so are earnings. For the moment, anyway. And that's the caveat with this stock: things can look great for a current release but that's only good for the one movie. If the next movie is a flop, the stock is going to reflect it. That's why the new projects such as the Broadway musical and the television special are important: they give the company a more diversified revenue stream.

If you like the entertainment business, you'll want to spend more time with DWA. Your research might include seeing Shrek 3 and finding out why the movie series is so popular. Not a bad way to spend time with your kids and doing research.

Disclosure: Author has no position in DWA

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