Fool on the Street: Drawn to DreamWorks Animation

DreamWorks Animation (NYSE: DWA  ) CEO Jeffrey Katzenberg recently spoke with Jessica Reif Cohen at the Merrill Lynch Media Fall Preview conference. Not surprisingly, he's pretty high on the long-term value of his studio.

It's all about the pipeline
Movie studios depend on a solid pipeline to drive returns and shareholder value. DreamWorks Animation is no exception. Katzenberg spoke about a few projects coming down the animated pike.

Bee Movie, written by and starring Jerry Seinfeld, will be out in November, and it promises to deliver the famous comedian's wit and sensibility. Shareholders might be disappointed by the movie's international potential, though. Katzenberg seemed to hedge his bets when speaking about Bee Movie's ability to perform in non-English-speaking territories. On the flip side, he also seems to think this project will bring in an older audience beyond the core youthful demographic. That's a big positive, since making pictures that appeal to multiple demos is crucial.

Kung Fu Panda, starring Jack Black and Jackie Chan, sounds much more interesting to me, since Katzenberg believes it's a bona fide franchise in the making. I almost got the sense from reading Katzenberg's comments that he believes this could be another Shrek in the making. That obviously remains to be seen, but I like that the company is thinking big on the film, hoping that it will spawn several sequels. I also admire the CEO's willingness to criticize the last act of Madagascar. I didn't see the film, but Katzenberg didn't think it was up to par with the rest of the cartoon. Such honesty is refreshing, and it shows a willingness to improve on the creative process. The upcoming Madagascar sequel will hopefully reflect this.

Blu-ray not OK for DreamWorks
Katzenberg was asked about the war between Sony's (NYSE: SNE  ) Blu-ray and Toshiba's HD-DVD. It's well-known by now that Viacom (NYSE: VIA  ) , which distributes DreamWorks Animation's products, has taken HD-DVD's side in the struggle. Katzenberg felt that since HD-DVD players were the cheaper alternative, they would be better positioned to gain significant traction. He also cited the cost-effective nature of manufacturing HD-DVD discs.

I don't really agree with this logic, and I've stated so in a recent piece. The Blu-ray format should still be engaged, since it seems to be selling better, and since Sony's PlayStation 3 is a Blu-ray player right out of the box. Personally, avoiding the format seems silly to me, and it shuts out a whole base of consumers. Taking sides right now doesn't necessarily engender a lot of goodwill or economic value.

No fairy-tale share repurchases?
Besides dividend payments, share repurchases are a great way to return value to shareholders. Unfortunately, Katzenberg didn't sound completely enthusiastic about buying back his company's stock.

After pointing out that DreamWorks Animation did take $200 million of stock off investor Paul Allen's hands, Katzenberg said that he wants "to strike a balance" between utilizing the half-billion or so of cash and equivalents on the balance sheet for buybacks, and using the greenery for capital investment and acquisitions. That's understandable, and it's important for shareholders to realize that innovation in the computer-generated cartoon business can come at a price.

However, a look at the latest 10-K shows that DreamWorks Animation doesn't have high capital requirements, and that its cash-and-equivalents level has been rising. Katzenberg stated that "if there is an opportunistic moment for us in terms of a stock purchase, then it's something we would discuss with the board."

Would this indicate that the CEO believes his stock isn't cheap at current levels? It might, but I don't think that should deter current shareholders from continuing to hold the stock, or dissuade potential shareholders from considering the company. DreamWorks Animation is a premiere brand in its genre, and I think it'll enjoy a lot of cash generation in the future, enough to fuel plenty of buybacks -- and maybe even a dividend or two.

The Fool's conclusion
I'm a Disney (NYSE: DIS  ) shareholder, so I'm obviously not rooting for this competitor's success. But while I disagree with his stance on Blu-ray, Jeffrey Katzenberg seems to be a competent steward for the studio, and DreamWorks should hold up well against the glut of CGI-animation products that seem to be pervading the marketplace. Everyone and their brother is releasing these kinds of films -- Time Warner (NYSE: TWX  ) has given us Happy Feet, News Corp. (NYSE: NWS  ) took us to an Ice Age or two, etc.

DreamWorks Animation has a great pipeline of films ready to roll over the next several years, and although it may not be ready for big buybacks right now, keep a level head about that. I'm betting that buybacks will happen down the road. For now, DreamWorks is definitely worth a look.

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