There are two major forces in the computer-generated animation world -- DreamWorks Animation (NYSE:DWA) and Disney's (NYSE:DIS) Pixar brand. Since the Mouse purchased Pixar this past year and brought Steve Jobs' wunderkind company to the Magic Kingdom, DreamWorks Animation is pretty much the pure play in this arena. Like Pixar, DreamWorks Animation has a major franchise at its disposal -- Shrek is to the latter what Toy Story is to the former. Both are adding to their valuable film libraries with each passing year. Who will eventually win the crown of top computer animator? For that matter, will some other studio come from nowhere and usurp that distinction from both? Too early to tell. For now, though, let's take a look back at DreamWorks' performance in 2006.
A look back
Back in March, just as springtime was set to begin, I found that DreamWorks Animation came in not like a lion but as a sleepy little lamb. The company saw declines in all its major metrics. For the fourth quarter, sales decreased 65%, operating income dropped 83%, and net profit dived 67%. Free cash flow, on the other hand, wasn't a problem, as net cash from operations for the full year came in at over $370 million, compared to the use of $43 million in the comparable timeframe (helped along by a receivable having to do with a distribution agreement). I lamented the performance of Wallace & Gromit: The Curse of the Were-Rabbit, but highlighted the economic force of Madagascar and its home-video debut during the holiday season.
A short time before the company's release of Over the Hedge in May, it reported results for the first quarter of its new fiscal year. Rick Munarriz studied the numbers -- they weren't the stuff of high-octane growth. Revenues had dropped to $60 million from $167 million in the previous period, and earnings per share were $0.12 as opposed to $0.44. That wasn't great, but Wall Street had expected the studio to earn a lot less. Rick also counseled investors to expect variability for this kind of business -- there are gaps of time in between the high profile releases, and a computer-generated tentpole cartoon can't be delivered to the multiplexes every three months. Rick also surveyed the glut of titles in the genre coming to the marketplace, and how some tanked (Disney's The Wild, for instance) and some prospered (News Corp.'s (NYSE:NWS) Ice Age: The Meltdown).
Then, in August, DreamWorks Animation rendered a wonderful Q2 earnings picture for its shareholders -- whereas Wall Street expected a paltry two pennies, the company minted a very lucky $0.13 per share. This was in comparison to a year-ago loss. The fairy tale was completed by the fact that revenue more than doubled and that the shares had become attractively priced after hitting a new low. Rick singled out the driving force in the quarter's fantastic performance -- the valuable library of past product. Indeed, one has to remember that content concerns add to their portfolios with each passing year; they can then be mined for money over and over again, so long as the brands contained within them are managed properly.
At the beginning of November, when third-quarter figures were released, we saw that the good times were still here for DreamWorks Animation. Although revenues declined 36% to $55.6 million, Wall Street thought that the top line would have only been somewhere in the vicinity of $38.8 million. As for the bottom line, a $0.10 per-share profit was generated, compared to a loss of a penny per share in the previous year -- analysts were again bested. Rick observed that the price of DreamWorks Animation's shares at the time were only a few pennies greater than the IPO price and could be had for 15 times the forward earnings estimate. So, even if you missed out on the first stock offering oh-so-long-ago, you could actually add one of the biggest brands in computer animation to your portfolio for about the same cost per share. What a dream! Oh, and remember the disappointment of that Wallace & Gromit flick? Well, it actually went on to sell five million home-video units up to that point.
DreamWorks Animation has held up well as a corporate entity during the past twelve months. It had a bit of an up-and-down trading pattern, but it has bounced off its low. As the company looks forward to 2007, one has to wonder if the stock's worst days are behind it.
The community votes
What is the current mood on DreamWorks Animation? Do investors believe that the stock is a worthy investment? We can see what the CAPS community thinks:
|
CAPS Ratings | 3 Stars |
|
Bulls |
132 |
|
Bears |
15 |
|
Bull Ratio |
90% |
|
Bear Ratio |
10% |
An overwhelming amount of CAPS players are bullish on the stock. "MarcoTheBeast" says:
"DreamWorks has a very exciting pipeline over the next 2 years with Shrek 3, Madagascar 2, and the opening films in what will hopefully develop into two new franchises."
There are only a couple bearish comments; "kristm" contributed one of them: "Mediocre products in an oversaturated market. Everything they release seems to be emulating Pixar."
Ouch.
When considering the field of CGI animation, it seems to me that Pixar is the brand that a vast majority of moviegoers think of first (I know I do). DreamWorks Animation will surely do everything it can to counteract Pixar's power at the multiplexes. The past year was a competitive time for the genre, as many studios tried to capitalize on the public's fascination with cartoon images rendered via algorithms; Time Warner (NYSE:TWX) recently scored with Happy Feet. DreamWorks Animation is still here, and it will remain a force for a long time to come.
Did you know that the Motley Fool Stock Advisor is firmly behind DreamWorks Animation as a recommendation? Did you know that the service is beating the market by more than 40 percentage points? If you'd like a market-whipping portfolio, and if you'd like to join a community of investors who constantly learn from each other, sign up for a free trial. The Gardner brothers like to have their fun, but they are absolutely serious about generating profits for their subscribers. (Time Warner and Disney have also been singled out as picks in the newsletter service.)
What an animated year for DreamWorks Animation (pun firmly intended):
Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.
Fool contributor Steven Mallas owns shares of Activision and Disney. As of this writing, he was ranked 2,171 out of 16,877 investors in the CAPS system. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.
