DreamWorks Animation's Nightmarish Day

| About: Dreamworks Animation (DWA)

The stage was set for a monster box-office tally as the final installment of the “Shrek” franchise was released last weekend. Shrek Forever After, the fourth installment, would be the largest launch of an animated film showing at around 9,500 screens, a record number of which were 3D and IMAX showings which command premium pricing. This was supposed to be a huge day for DreamWorks Animation (NASDAQ:DWA), and estimates for the opening weekend ranged from $80 to $120 million. Instead the movie disappointed greatly, bringing in only $71.3 million, $50 million less than the last Shrek movie. DWA is trading more than 10% lower in late day trading on the weaker than expected attendance estimates.

It appears DreamWorks' beloved cash-cow “Shrek” has finally run its course, and subpar reviews did not help matters, either. To be fair, this was the fourth best opening weekend for an animated movie of all time (three of the top four are Shrek movies), and the mass appeal of Shrek may help it achieve longevity at the box office. DreamWorksDWA last major release, How to Train Your Dragon, was a disappointment on the opening weekend in March but later box office results rescued the film. Furthermore, Shrek was number one ranked at the box-office this weekend, while the second-place film brought in only about a third of Shrek’s haul. Shrek should continue to be the top kid-friendly film for some time, as there are no 3D or animated films set to be released until Toy Story 3 on June 18.

The best case scenario would be for Shrek to achieve the same staying power as How to Train Your Dragon, which grossed only $43 million in its opening weekend yet finished with $210 million in box-office receipts. Many analysts expect the Shrek film to make 3x its opening weekend performance, but anywhere close to the nearly 5x for “Dragon” would be a boon for DreamWorks. 3D theatres accounted for 61% of domestic opening weekend sales and, with four full weeks without another 3D release, DreamWorks may be able to recoup much of the estimated $300 million spent on making and marketing the film. The film will likely still be profitable as international sales were not included in the total and were actually fairly strong, bringing in $26 million. Interestingly, particular strength came from Russia, where Shrek brought in $20 million and topped “Avatar” for the country’s box-office record.

At Ockham, we are reiterating our Fairly Valued or natural stance on DWA, but after today’s sell-off it trades at the low end of its historical price-to-cash earnings and price-to-sales ranges. The opening weekend results are disappointing, but it was clearly the top draw for movie-goers. We expect to see Shrek at or near the top of the box office for the next few weeks, and think that the market may have panicked a little prematurely much in the same way it did with “Dragon”. Remember, the stock sold off more than 8% in response to that disappointing opening weekend.

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