DreamWorks' Creature Discomforts

Nobody was expecting the flick to topple Sony's (NYSE:SNE) The Da Vinci Code. Unfortunately, the generally favorably reviewed Hedge now sports the studio's weakest opening for a computer-rendered feature since its freshman try, Antz, in 1998.

There is a bit of urgency here. Disney's (NYSE:DIS) Cars opens two weeks from Friday. At that point, Over The Hedge is unlikely to rake in a whole lot of coin, given Pixar's immaculate pedigree as the pioneer in full-length computer animation. (And those Cars trailers look awfully sweet to boot.)

Beast or famine
The difference between a hit and a miss can be substantial. This past quarter, DreamWorks Animation moved just 3.3 million copies of Wallace & Gromit: The Curse of the Were-Rabbit on the retail market but cleared 17.5 million net units of Madagascar.

In Over The Hedge's defense, the stop-motion Wallace & Gromit film generated just $16 million over the course of its opening weekend. With the seasonally potent Memorial Day weekend coming up, Over The Hedge should still easily top the $100 million mark before it ends its theatrical run. No one will label the film a dud, but that doesn't make it less of a disappointment for the studio. The film opened on more than 4,000 screens, and its tally relative to previous DreamWorks films doesn't account for inflation; as ticket prices inch higher, the numbers increasingly appear to favor the more recent releases. This could have been an exclamation point after a questionable quarter, but it's looking more like either a question mark or a semicolon.

Unfortunately, moviegoers are facing a glut of computer-generated releases. That hasn't stopped Ice Age, Toy Story, and Shrek sequels from topping the originals, but it make me wonder whether a recognized property is now the only way to stand out in the digital crowd.

David Gardner liked DreamWorks Animation's prospects so much that he recommended the shares to Motley Fool Stock Advisor subscribers this past summer. The stock has handily beaten the market since its selection, but will the future be as kind?

The company should be able to successfully milk the Shrek and Madagascar franchises for a few more years, but the challenge remains to find fresh characters to make sure that it doesn't overexpose its cash cows.

I dream of DreamWorks
When Disney successfully bid to buy Pixar, the deal initially valued the company at $7.4 billion. By the time it closed this month, Pixar's value had grown to nearly $8.5 billion. That may excite speculators as they approach DreamWorks Animation's $2.6 billion market cap, but the discount is there for a reason.

DreamWorks Animation's financials have been lumpy in the past. Even at its peak, its profit margins have clocked in nowhere close to Pixar's. As the only standalone computer-animation studio that trades publicly, investors may turn to DreamWorks Animation as a proxy for theatrical animation, but it would be risky to grant bellwether status on a company releasing no more than two features in any given year.

Even under Disney's arm, Pixar remains the best gauge available. One can reasonably argue that if Pixar's Cars stalls at the box office -- unlikely as that may seem -- DreamWorks Animation's shares would actually suffer alongside Disney, since the sputter would spook investors out of the niche.

Just about everyone has mixed feelings about Pixar hooking up with Disney. However, it's most likely a less riskier investment as part of a major media conglomerate than it was a standalone leader in a sector running out of elbow room. Is DreamWorks Animation next?

Viacom (NYSE:VIA) already acquired DreamWorks SKG -- the animation studio's original parent company -- a few months ago. At $1.6 billion, the deal is worth less than what it would it take to absorb the DreamWorks Animation appendage, but it did make Viacom the distributor of the computer animation studio's features, just as Disney distributed Pixar's films before swallowing it whole. The key difference here is that Viacom doesn't finance or have any ownership stake in the DreamWorks Animation projects. One gutsy buyout offer can change that.

Exit, stage right
DreamWorks Animation isn't formally on the block. That doesn't mean that it's not available at a fair price. In terms of bargaining chips, this may be the ideal time for the company to line up prospective suitors. Its next release -- Flushed Away -- has plenty of potential. The November film's trailer is the best I've seen this year, save for Cars. The unconventional premise of a society mouse being flushed into the seedy sewer underworld is risky, though. If Flushed Away alienates more viewers than it takes in, the company would only have its Shrek the Third release in 2007 to separate it from a serious freefall.

Of course, many investors assume that there's no way the Shrek franchise could falter, with the sequel standing tall as the highest-grossing animated film of all time. That confidence is practically priced into the shares. If the third Shrek fails to meet those lofty assumptions, well, good luck.

David Gardner knows what he's doing. His average stock pick for Motley Fool Stock Advisor subscribers has appreciated by better than 50%, while the market has averaged a mere 17.8% return. (For full access to all of David and his brother Tom's market-walloping picks, try a free 30-day guest pass.) I trust him to know when to pull the ripcord on DreamWorks Animation, if it should come to that.

I expect DreamWorks Animation to know where the ripcord is, too. Will it know when to pull it? How soon is now?

Longtime Fool contributor Rick Munarriz loves the art of animated filmmaking. He owns shares of Disney, which is also a Stock Advisor pick. The Foolhas a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.