Green Dreams Come True

New stock on the block DreamWorks Animation (NYSE:DWA) would hardly qualify as a hidden gem. When it went public six weeks ago, raising $700 million, the stock went from its $28 IPO price to close at $38.75 a share. DreamWorks was hot -- and discovered.

Since hitting an all-time high of $42.60 on Monday, the stock has settled back (with today's 6% loss) to $38.00 a share. Cooling the stock may have been the tidbit in today's earnings announcement that Shrek 3 was being delayed -- from November 2006 to May 2007.

Shrek may be a green, ugly, smelly ogre -- but, if he smells green, it's the aroma of those greenbacks he draws like a magnet. Shrek 2's worldwide box office take is $840.6 million (that's No. 10 all-time without adjusting for inflation). The DVD sales set an all-time record by selling 30 million units in just more than four weeks.

While investors are drooling for the next Shrek payday, the company says it wants to maximize the return by having an early summer movie release followed by a holiday season DVD release -- hence the May release date for Shrek 3. Hey, that makes sense! But doesn't just about anyone who knows anything about movies know this?

Newsworthy was that Shrek 2 and Shark Tale enabled DreamWorks to beat analyst earnings estimates by two cents a share. The company's stock is trading for 17 times analysts' $2.30-per-share earnings projection for 2004 -- a lovely-as-princess-Fiona number when compared with competitor Pixar's (NASDAQ:PIXR) 38 times 2004 earnings estimates.

While DreamWorks' earnings are expected to decline to $1.61 next fiscal year, remember the movie business is boom-and-bust. DreamWorks and Pixar are riding high, but consumer tastes can change. Disney (NYSE:DIS) might get its act together in animation, and other studios might figure out how to fight back -- and deflate animation earnings to Lord Farquaad's size (four feet, for those who haven't seen the movie).

Consider too that the domestic movie business is not booming. In 2003, the number of tickets sold decreased 3.5%, although revenue rose 0.2% -- hardly runaway growth.

DreamWorks is making green and selling for a reasonable P/E. More important, CEO Jeffrey Katzenberg has a history of delivering animation blockbusters, and the recent IPO gives the company the capital to sustain its success. Although the box office receipts aren't growing rapidly, DreamWorks has established its niche and is delivering strong earnings.

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Fool contributor W.D. Crotty owns stock in Pixar and Disney.