Coming to Terms With Dreamworks Animation

| About: Dreamworks Animation (DWA)
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Dreamworks Animation SKG (NASDAQ:DWA) produces computer animated features -- including the box office hits Antz, Shrek, and the record-breaking Shrek 2 (the highest-grossing animated film ever). DreamWorks Animation develops content that is distributed and marketed by Paramount Pictures. DreamWorks Animation previously released films in collaboration with Aardman Animations (2005 Best Animated Feature Oscar winner Wallace & Gromit: Curse of the Were-Rabbit and 2006's Flushed Away); however, the partnership ended in 2007. The 2007 release of Shrek the Third again broke records. In 2004 former parent DreamWorks spun off the company.

Shrek the Third was a megahit for DWA. In the second quarter of this year, it was the main reason revenues were up almost 200% to $222.5 million. Of that, the movie took in tickets worth $109.1 million. Totals for the film come to $320 million, just in the U.S. Overseas it filled the seats as well, bringing in $400 million.

More overseas receipts will be showing up in the third quarter as those revenues aren't reported immediately. There's a lag of about 30 days between box office tallies and reported revenues by DWA. Following those results, look for the home release version to add to total revenues for this blockbuster. However, it's not the only blockbuster coming out in the late fall. Five films with receipts over $300 million are coming at the same time. Six other movies, each gathering more than $100 million will also be released. All are looking for the Christmas season to be very giving. Even with the compeitition, analysts are looking for Shrek the Third to sell 15 million to 20 million copies in the fourth quarter with another 12 million to 15 million to move in 2008.

The new exciting film for DWA is a collaboration with Jerry Seinfeld called Bee Movie, expected to be released in November. You may have seen the promotion done this year at the Cannes Film Festival when the comedian slid down a wire dressed in a bee suit. Created quite a buzz. This new release should boost the fourth quarter sales and profits noticeably.

Earnings are expected to be $2.20 this year, $1.55 next year. That's up from 15 cents a share last year. In 2004, the company earned $3.81. If you own this stock, be prepared for volatility. Net profit margin last year was 3.8%. This year it should be 27.5%, then go to 24.3% next year. Return on Equity was 1.8% last year. Analysts are predicting 18% this year, 11.5% next year.

You can see by the numbers that this is a stock that isn't growing a business. But rather it's putting out smash hits, one at a time, that have a certain shelf life. While the company holds the rights to the movies, there is usually a relatively short life span on sales for the films. Investors need to know more movies are in the works to get some comfort here. And there are more movies in the pipeline, with Bee Movie the closest to release. What's behind that isn't known yet.

And that's what investors need to come to terms with. This is a great company, putting out movies most age groups want to see. Can it keep it going? Will it go into other forms of film? No clear answers yet. But for the near future, things look pretty good.