Trolling for Ideas, Part 2: Dreamworks Animation

DWA (Dreamworks) is an interesting company. The business is entirely hits driven – the movies decide the profit. The next three that DWA has lined up are Madagascar 3 in summer 2012, The Rise of the Guardians in winter 2012, and The Croods in early 2013. Here is a quick preview of the two movies for this year: http://www.youtube.com/watch?v=f5TKd82FRnw

Judging from comments and my own intuition, I feel that Madagascar will perform roughly in line with expectations – slightly worse than the old Madagascar films, but still enough to be very profitable. I am guessing a ~$500mm worldwide gross.

Rise of the Guardians looks far more interesting. This could be a major blockbuster, which means closer to the $1 B mark on box office. If that is so, this movie alone could cause a major appreciation in stock price.

The company is also going to be booking revenues from its ongoing sales of Puss in Boots and Kung Fu Panda. I will have to do more research to see the full impact from these films.

Overall, DWA does not have any fundamental reasons to appreciate short term, but the perception is net negative. S&P is strongly bullish, but analysts have a median target of $18, slightly below its current price, and the lowest estimate sits at $12. $12? Really? The perceptions are probably more negative than the stock warrants.

The perceptions may turn more positive on general strength in the movie industry as we approach the summer. Maybe I could purchase sometime soon. I may have to wait 12-18 months for appreciation, but I strongly feel that 18 months from now, the stock will be at least 40-50% higher, on either Rise of the Guardians or The Croods.

Indeed the price seems to be on a fairly strong uptrend, breaking its long slide. So, fundamentals are positive, but will take a long time to play out. Perceptions are net negative. And the price is beginning to turn. Perhaps this is the best time to get into DWA.

The company will announce earnings later this month, where they will release results of Puss in Boots and Kung Fu Panda sales. Puss in Boots performed well, with a $522 mm box office worldwide, but it was by no means knock-out. However, with the perceptions this negative, we could be in for a nice pop on this stock.

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