DreamWorks Animation: Draw, Partner!

With apologies to Jessica Rabbit, the latest quarterly report out of DreamWorks Animation (NYSE: DWA  ) isn't bad -- it's just drawn that way. The computer-animation specialist's fourth-quarter numbers are really a lot better than they look.

It's true that the company posted a loss of $0.20 a share, but that includes an $0.80-per-share hit from writing down the value of Flushed Away. Analysts were actually braced for a loss of $0.42 a share. Without the charge, DreamWorks would have earned $0.60 per share for the quarter, and $0.95 per share for all of 2006.

2000 flushes blue
But we just can't flush away Flushed Away. When Shrek the Third is a summer smash, is anyone going to mark down the scintillating profitability just because it did so well? Of course not. When you're a company like DreamWorks Animation, you're riding mostly on the performance of your two annual theatrical releases.

Aim well, and you've got a multiplex hit that will drum up consumer licensing deals, video games, and ultimately DVD retail sales. Even when you're not exactly "on," you can still make out okay. DreamWorks scored marginally better with Over the Hedge last May, but it was still seen as an initial disappointment. However, that didn't stop the film from selling millions of copies of the related video game by Activision (Nasdaq: ATVI  ) , nor nearly 10 million DVDs last year.

Those DVDs were the major driver in the latest quarter's report. Over the Hedge accounted for more than half of the $204.3 million that DreamWorks generated in fourth-quarter revenue. A deep library is always a good friend to have, with Madagascar contributing $36.2 million and Shrek 2 kicking in $31.1 million during the period.

Running out of steam before ink
Wall Street has always had a tough time figuring out the animation studios. They were perpetually underestimating Pixar until it was acquired by Disney (NYSE: DIS  ) last year. They're huffing and puffing well behind DreamWorks Animation today. You already know that the pros missed on the bottom line, but analysts also figured that revenue would come in at just $158.9 million for the quarter.

The market-thumping probably won't end there. The next couple of years should serve the animator well. Shrek the Third is going to be huge in May. Jerry Seinfeld's Bee Movie comes out in November. That one may go either way, but investors will be too busy counting the Shrek money to notice if it flops.

Next year should be even better. Madagascar's sequel probably won't put up Shrek-like numbers, but the buzz is strong on Kung Fu Panda. It will be the company's latest attempt to establish a third monster franchise. If it's a hit, the company may be able to cruise over the next decade by releasing Shrek, Madagascar, and Kung Fu Panda sequels every third year.

It's never as easy as that. Consumers may tire of franchises. Then again, Over the Hedge and Shark Tale each topped the $150 million mark in ticket sales domestically. Maybe that third franchise is already in the vault. Maybe Bee Movie will "bee" more than a sleeper hit.

Drawn together
DreamWorks Animation is in a pretty good place. With Pixar on Disney's arm, it's now the market's No. 1 pure play in theatrical animation, which has made it the belle of the ball. Not that it was ever the beast. The company's characters are being dished out in the world's largest fast-food chain, thanks to a Happy Meal deal with McDonald's (NYSE: MCD  ) . It has technology deals with Hewlett-Packard (NYSE: HPQ  ) and AMD (NYSE: AMD  ) to ensure that it's armed with the latest pixel-crunching hardware on the cheap. Oh, and Shrek the Third is now less than three months away.

This presents investors with the intriguing possibility of picking up DreamWorks Animation at a historically attractive price. The company has hit more than it has missed since going public three years ago, yet its stock trades for less than its $28 IPO price.

That stings, but only because it's such a sharp opportunity. Did I really say "sting"? Step aside, Jessica Rabbit. Now I owe an apology to Seinfeld's Bee Movie.

DreamWorks Animation, Activision, and Disney are all Motley Fool Stock Advisor newsletter recommendations. To see what other great stocks have been recommended to the market-crushing newsletter service, take a free 30-day trial today.

Longtime Fool contributor Rick Munarriz loves the art of animated filmmaking. He owns shares of Disney and DreamWorks Animation. 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.


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