Why DreamWorks Animation SKG Inc. Soared

DreamWorks shares fly for an odd reason. Find out what investors should be monitoring instead.

Aug 18, 2014 at 3:45PM

This article originally appeared as part of ongoing coverage in our premium Motley Fool Stock Advisor service. We hope you enjoy this complimentary peek!

What: Shares of DreamWorks Animation (NASDAQ:DWA), a developer and producer of animated films, shot higher by as much as 13% after the company announced the appointment of a new chief financial officer.

So what: The company said in a press release issued before the market opened that Fazal Merchant would take over as CFO. For the previous two years Merchant was the CFO and senior vice president of DIRECTV's Latin American operations. He is scheduled to assume his new role on Sept. 15. The hiring became necessary when previous DreamWorks CFO Lew Coleman took the role of vice chairman so he could focus on improving DreamWorks' global reach.

Now what: Generally speaking, the hiring of a new CFO doesn't often encourage such a big move (in either direction) in the underlying stock. I believe this serves as a reminder that the day-to-day fluctuations in stock prices -- and the emotions that can motivate those trades -- sometimes just don't make a lot of sense. Instead of focusing on unpredictable daily fluctuations, investors should keep their eye on the long-term growth-drivers that have the potential to send DreamWorks' shares higher.

What are those possible growth drivers? Technological innovation sits at the top of the list. DreamWorks is in essence a gigantic data company now, and the ability of its animators and the rest of the team to work as efficiently as possible is paramount to its success. The company has made hefty investments in its data center and workstations to bring its operations into the cloud and allow projects to be passed from one department to another with ease. In the past, this just wasn't possible. The result is the ability to debut three new movies per year.

That brings me to the next growth driver to watch: timeliness, which is key to success in the film industry. DreamWorks, a company that is only releasing three animated films a year, needs to stay true to its release date timeline in order to demonstrate to investors that its reinvestments in workflow efficiency are paying off.

Finally, investors should look at DreamWorks' big picture productions. No film producers hit a home run every time at bat. There will be failures. Investors will want to assess whether the magnitude of DreamWorks' successful releases outweighs that of its underperforming films.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool recommends Apple, DreamWorks Animation, Google (C shares), and Netflix. The Motley Fool owns shares of Apple, Google (C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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