A Second Trip to Madagascar

Can Madagascar become the next Shrek? DreamWorks Animation (NYSE: DWA  ) , a Motley Fool Stock Advisor recommendation, seems to think so.

The cartoon company led by former Disney (NYSE: DIS  ) executive Jeffrey Katzenberg announced plans to turn the animal-themed computer animated hit into a bona fide franchise. Ben Stiller, Chris Rock, and Jada Pinkett Smith have signed on to reprise their roles in the Madagascar sequel, which will hit the multiplexes in 2008. A direct-to-video spinoff movie featuring the film's penguin characters will also debut in 2009. And if that's not enough, those wily penguins will get their own 10-minute short this October, screening in front of Dreamworks Animation's Wallace & Gromit: The Curse of the Were-Rabbit.

Like its rival and fellow Stock Advisor pick Pixar (Nasdaq: PIXR  ) or any other media company, DreamWorks Animation's survival depends on its brands. A string of successful sequels will guarantee a slew of revenues down the line. Think of it like a pharmaceutical company's drug pipeline -- if potential blockbusters are nowhere in sight, why would you want to buy a Pfizer or a Merck?

I have to admit, I wasn't too impressed with Madagascar's opening weekend. But the film has made $500 million across the planet, with nearly 40% of those dollars coming from the U.S. I think that qualifies as a successful franchise.

Does knowing that more films like Shrek and Madagascar are coming down the pike make the current valuation of the stock seem attractive? The Fool's own Seth Jayson has tackled this issue before, concluding that speculative gastrointestinal instinct (i.e., "going with your gut") might prove a more useful tool than a discounted cash flow analysis in this particular case. Getting a handle on a movie studio's future income projections is astoundingly difficult at best.

This is why investing in media companies absolutely requires long-term patience. Bottom line: Keep an eye on the pipeline. Watch every announced project. If you like what's coming up, and if the brand equity seems to be improving with each idea that the company wants to bring to fruition, then it makes sense to be an owner. DreamWorks Animation's stock may not be as cheap since it has bounced off recent lows, but with the Madagascar sequel to look forward to, it might still represent a nice investment.

Toon up with further Foolishness:

Fool contributor Steven Mallas owns shares of Disney. The Fool has a disclosure policy.


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