It won't be long now before DreamWorks Animation (NYSE:DWA) completes its anticipated new stock offering. The computer-rendering specialist behind Shrek and this month's popular Shark Tale has set an initial price range of between $23 and $25 in a deal that will help raise just over $700 million for the company.

Nothing is pixel perfect. Buying into the new offering means getting over the fact that the company has posted losses during three of the past four years. While the money that DreamWorks will receive in issuing 25 million new shares to go along with the 4 million shares being sold by existing stockholders will be more than enough to offset the $400 million in debt that the company's balance sheet was sporting, Pixar (NASDAQ:PIXR) is a cash-rich rival, and computer-drawn epics done right don't come cheap.

But if you figured that DreamWorks Studio wouldn't dare spin off its animated arm unless it had something worth stoking the fire for, you would be right. On the strength of Shrek 2, DreamWorks Animation posted a profit of $78 million on $341 million in operating revenue during the first half of the year.

If you back out the distribution fees that were booked as revenue and the distribution costs that were tacked on as expenses -- items that are the handiwork of the parent company, not DreamWorks Animation -- you get a more interesting pro forma income statement that has the company earning $66.5 million in profits on $181.5 million in revenue.

I call it interesting only because you'll notice that while the top line was nearly shaved in half, the bottom line held up much better. Getting rid of the low-margin distribution filler gives a healthier indication of how lucrative successful animation can be. It's not everyday you find companies pumping out 37% in net profit margins -- that is, of course, unless you consider Pixar. It produced net margins of 53% as it earned $64 million on $120 million in revenue over the same six months.

Do these juicy markups make you wonder why Disney (NYSE:DIS) is scaling back on its in-house animation? You're not alone. But the issue here is whether investors will be paying a fair price for DreamWorks Animation.

With just over 105 million shares outstanding after the offering, it will be as if the company earned $0.63 a share over the first half of 2004. As Pixar knows -- and DreamWorks' off years prove -- this is a cyclical business where earnings come and go with the timing and success of features. It would be ludicrous and strictly hypothetical to propose a valuation based on DreamWorks Animation duplicating its results over the latter half of the year. However, if it did, it would be going public at roughly 20 times this year's earnings.

That's certainly reasonable. It's a significant discount to Pixar's market multiple, though one has to consider that Disney is still collecting half of Pixar's profits until its deal runs out by the end of next year.

But potentially working in DreamWorks Animation's favor is its aggressive production schedule. While Pixar has been pressed to get just one theatrical release done every year, DreamWorks is going for two. While quality may naturally be a major concern, especially when compared to the classy Pixar and its sterling box-office track record, the trailer I saw for DreamWorks' next release -- next summer's Madagascar -- looked very promising.

Like its films, this is one offering that I will be keeping an eye on.

Longtime Fool contributor Rick Munarriz is still a kid at heart. He owns shares of Pixar and Disney.

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