Is there money to be made in rendering your way into the hearts of children? The logical answer is yes, even though shares of DreamWorks Animation (NYSE: DWA ) and Nickelodeon parent Viacom (NYSE: VIA ) are trading lower over the past year. Disney (NYSE: DIS ) has held up better, but that may be attributable to having the top box-office draw last year, as well as the recent turnaround at ABC.
How is each company faring when it comes to theatrical animation? Should you invest in potential winners?
Those questions can be answered by bringing back the "date, marry, kill" game one last time this week. We can date just one stock for short-term gains. We can marry just one stock as a long-term investment. The third stock gets rubbed out.
I made my choices. Let's see if you agree.
Date DreamWorks Animation
If the recent headlines out of DreamWorks Animation don't feel particularly inspiring, you're missing the bigger picture. Sure, the company had a rough year in 2006. Flushed Away was a disaster, ringing up just $64 million in domestic ticket sales. DreamWorks fared better with Over the Hedge, but it still had to take a charge to write down the value of Flushed Away.
So why is the computer-animation studio worth snuggling up to in the near-term? Well, the pipeline is potent. Shrek the Third hits a multiplex near you in May. That's about as close as you can get to a sure thing in Tinseltown. The second installment generated $441 million in domestic ticket sales, more than any other animated film -- including the rich legacies of Disney and Pixar.
A few months later, the studio will be back with Bee Movie. This one could be a sleeper hit. It's Jerry Seinfeld's project, and it's loaded with comedic voice talent. Don't' worry about it either way, since shareholders will still be giddy counting all of the Shrek money at that point.
The real key to DreamWorks Animation will come next year. Madagascar 2 will premiere, and so will Kung Fu Panda, featuring Jack Black and Jackie Chan. With a fourth Shrek sequel in the works, it would be great if the company had two more franchises that could spit out a blockbuster sequel every third year. Madagascar may be one. Will Kung Fu Panda be the other? It could be. The promising feature already has good industry buzz and a television show in the works.
If DreamWorks Animation is able to put out a popular sequel while taking a chance on a potential new franchise every year, it would be sitting pretty as it continues to build up its vault of marketable characters and films.
Pixar didn't come cheap, but it restored faith in Disney's storied animation department overnight. Disney had been struggling on its own to get it right. Can you name a single in-house animated feature put out by Disney in recent years, beyond Lilo & Stitch?
Disney hasn't wasted any time in cashing in on the goodwill of Pixar's beloved characters. If Disney's troubled California Adventure park can be saved, it will be mostly due to next year's addition of Toy Story Mania, the likely rollout of Carland Radiator Springs in a few years, and the Monsters, Inc. dark ride that replaced one of the lamest attractions in the park.
The Pixar influence isn't just a California Adventure savior. A new Finding Nemo musical just opened at Florida's Animal Kingdom. Nemo has also inspired new additions at EPCOT in Florida and Disneyland in California.
Now that Pixar has the resources to release at least one animated film a year, it will be interesting to see the influence of Pixar's proven storytellers on what's left of Disney's own animation studio.
We're living in exciting times. Great full-length features can garner global licensing riches and unlimited digital opportunities. The future is margin-rich and incremental. If you don't see the logic of buying into the leader in family entertainment, the child in you has been asleep for way too long.
Is it wrong to gang up on Viacom? Since last year's split with CBS (NYSE: CBS ) , the MTV and Nickelodeon parent company has struggled. Its animated releases, like last summer's Barnyard or titles based on its popular Nick shows, have rarely generated any kind of box-office buzz.
You also have the seemingly incomprehensible move of having CBS sell off the Paramount Parks that used to aggressively market the Nickelodeon characters. Yes, Cedar Fair (NYSE: FUN ) isn't likely to scrap SpongeBob and pals from the former Paramount Parks. It may even license the characters itself. Still, it's a mistake from a marketing perspective to let someone else control the flow of the character-driven experience.
Viacom just hasn't been able to cash in on its captive cable audience. Of the 30 most successful animated features of all time, how many were Viacom's handiwork? None. The only one to top the $100 million mark for Paramount is The Rugrats Movie, and that came out nine years ago!
Even companies that aren't traditional animated powerhouses, like Time Warner (NYSE: TWX ) and News Corp.'s (NYSE: NWS ) 20th Century Fox, have scored well with Happy Feet and the Ice Age movies, respectively.
A contrarian would argue that Viacom's missed opportunities represent upside potential. I'd love to see it that way, but maybe that ship has passed. Last year's winning new kid-friendly properties came from the Disney Channel. Rugrats: Thirtysomethings? It hasn't happened yet, but Viacom is sure feeling stale these days.
Check out the rest of the "date, marry, kill" series:
- Date Sirius, Marry Apple, Kill XM
- Date Yahoo!, Marry Google, Kill Microsoft
- Date Netflix, Marry Amazon, Kill Blockbuster
- Date Xbox, Marry Wii, Kill PlayStation
Longtime Fool contributor Rick Munarriz is still a kid at heart and loves the right kind of theatrical animation. He owns shares in Disney and DreamWorks Animation, and units in Cedar Fair. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.