Dreamworks Animation: Love the Movies, Not So Hot on the Stock

Shrek - who has not seen it, in fact, all 4 increasingly bad installations of it. But love it or hate it, Dreamworks Animation has created a huge green monster franchise from it. With its string of other box office successes such as How to Train A Dragon and Megamind, DWA's 3D animation legacy looks sealed in concrete, and a viable competitor among the other movie studios. Great movies! But does it make for a great investment?


Disclosure: I have no holdings in DWA.

Dreamworks Animation (NASDAQ: DWA)

1 Apr11

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P=27.93

DWA’s FY follows CY.

EPS_10=1.96

PER_10=14.25x

Dreamworks releases about 2 films a year, which makes it very susceptible to poor results if any of these 2 films bomb at the box office. It has a pipeline of films, but it is difficult to predict if such films are going to be successful, like Puss in Boots, which uses a cat character from Shrek (which is to date its biggest success). Among its films, the only one I actually know is Shrek and then not all its four parts either. It releases all its film in 3D and is purely an animation house. I think therein lies its main risk, that it is only producing so few films per year.

Its competitors are Pixar (owned by Disney) and other animation houses. Hence its capabilities to produce CG animations are not unique, and is dependent on the creativity of its team, which is an intangible that is impossible to price.

I would watch How to train your dragon tonight, and see if any new ideas concerning DWA comes to me.

2Apr11

Love the movies, watched Megamind also. Unfortunately, I still think it’s a rather risky venture, even if they do produce more films than Pixar who produces 1 or less per year.

Their ROIC=14.3% with a 7.7% earnings yield. Respectable but not great.

FCF yields are low, even in this no-debt company. I think it is precisely because it has no debt that the WACC is especially high, at 12% hence it is actually penalised since the discount factor is greater.

But really, even if the numbers work out, I think the idiosyncratic risks here are way too high, given that everything is concentrated on 2 films, and if 1 bombs, the stock would be hit bad. It doesn’t help that the lineup of films for the next 3 years don’t jump at me either.

Conclusion: Discontinue research.