DreamWorks Gets a Courtesy Flush

If you're breaking up with a toilet-themed flick, is a "Dear John" letter appropriate on two different levels? The answer is probably moot for DreamWorks Animation (NYSE: DWA  ) , as a disappointing start at the box office for its Flushed Away animated film finds the company warning that it will have to write off a chunk of the $142.9 million it has capitalized in film inventory costs.

The film has grossed $40 million domestically through its first two weeks on the big screen. Even if the film -- about a society mouse that gets flushed into a wild and at times seedy sewer-rat world -- has legs, lingers into the holiday season, and scores well overseas, it won't materialize as a moneymaker. There are marketing and distribution costs to cover, and exhibitors don't screen the celluloid for free.

Maybe Flushed Away will turn a profit in the future, through next year's DVD release, licensing rights, and commercial broadcasts, but that's a stretch at this point. Despite generating favorable reviews, few will remember this as DreamWorks Animation's finest hour, and it's going to take the hit now. The current quarter will be saddled with a writedown of a sum that is yet to be determined.

Speaking of getting flushed away
Roddy, the upper-crust rodent who has to learn to adapt to a less pampered world, isn't the only one looking for a change of scenery here. A group led by original investor Paul Allen has triggered a demand registration that will unleash $330 million worth of stock in a secondary offering. Allen's holding company will be getting the lion's share of the proceeds, with smaller stakes being sold by Lee Entertainment and Viacom (NYSE: VIA  ) . Even though the transaction will find the vote-potent Class B shares converted into common Class A shares, the end result will maintain the same number of outstanding shares as before. Naturally, the company won't be receiving any of the money from the offering, either.

Is Allen's dumping of nearly 8 million shares a sign that he feels computer-rendered animation is on the ropes? I don't think so. The threat of Allen parting company with his holdings has been overhanging the stock for years, and it was really just a matter of time. Yes, it's a tricky and transitory time in family entertainment, but that's been known for quite some time.

We have seen the marketplace crowded for years, as companies like Sony (NYSE: SNE  ) and News Corp. (NYSE: NWS  ) have turned to the format in hopes of catching another Pixar in a bottle.

Speaking of Pixar, Disney's (NYSE: DIS  ) acquisition of the industry pioneer may have validated the sector earlier this year, even if suitors didn't exactly come calling for DreamWorks Animation as the next hot single studio in CGI animation. However, just because Pixar was the perfect soulmate for Mickey Mouse doesn't mean that DreamWorks has been a gold mine for investors. DreamWorks Animation went public two years ago at $28 a share. Despite a few wild swings along the way, that's pretty much where the stock is resting these days.

Ink rhymes with both stink and think
These are challenging times for the wizards of computer animation. DreamWorks Animation had a huge hit with Shrek 2, and Pixar scored well with The Incredibles, yet both instances ended with the studios taking a hit for unsold DVD returns from retailers last year.

Even if that one-two sucker punch said more about the frenetic pace of the DVD retail market than the state of computer-generated art, it has been enough to give investors a reason to evaluate the real value of these costly productions.

A lot is at stake here, because it takes three to four years and a nine-figure budget to put out a computer-animated film the right way. Skimp on any of that, and even usually receptive toddlers will turn their backs. That's the dynamic that may actually save a company like DreamWorks Animation, because it may shake out some of its smaller rivals, once they realize that the competitive landscape isn't as friendly as when it was just Pixar putting out a new film every other year.

DreamWorks Animation is still a young company, with a library just 13 films deep. The value of that library, which includes the Shrek and Madagascar franchises, is destined to be valuable in the long term. Really. Just look at Disney's ability to crack open its vault and continue to generate high-margin greenery off classics that were inked generations ago.

Motley Fool Stock Advisor has recommended both DreamWorks Animation and Pixar (now Disney) to its subscribers. I would have to agree with David Gardner's call here. DreamWorks Animation remains a quality company and has an active pipeline of theatrical releases in the works.

Right now, individual investors like you and I have the opportunity to buy into a company for less than the $28 a pop that fat-cat institutions and well-heeled brokerage clients paid in the fall of 2004. We didn't have to tie up our money for two years. Instead, we get the same price for a company that has added to its library and scored a few more box-office winners along the way.

Let Allen go. If you're smart and patient, you may be looking to take his place.

Longtime Fool contributor Rick Munarriz enjoys going to the movies. Sometimes he enjoys leaving them, too. He owns shares in Disney. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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