OK, I'll admit that I'm maybe not the ideal person to review a movie company. Although I find moviemaking fascinating, the idea of plopping down 10 bucks to go sit with a bunch of popcorn-munching, cell-phone-using, wailing-baby-carrying troglodytes for 90 minutes just isn't my idea of a grand old time.
Still, I loved Shrek, and there's no doubt that CG experts DreamWorks Animation (NYSE:DWA) have some major-league talent both in the boardroom and in front of the computers.
Results were strong for the company's fourth quarter. Reported GAAP revenue more than tripled to more than $495 million, and operating income rose from a loss to more than $280 million. On a pro forma basis, the numbers were still good; revenue came in at $445 million and operating income at $258 million.
(For Fools who are interested, the difference between the figures is caused by a distribution agreement with DreamWorks Studios that entitles DWS to an 8% distribution fee and recoupment of certain distribution and marketing expenses).
For the quarter, Shrek2 contributed more than $360 million in revenue, while Shark Tale produced another $62 million. Most of the remainder came from sales from the company's film library -- and most of that from the original Shrek movie.
Much like CG animation peer (and Motley Fool Stock Advisor recommendation) Pixar (NASDAQ:PIXR), DreamWorks often trades in reaction to investors' feelings about future movie releases. For 2005, the firm expects to release two movies -- a film called Madagascar in May and a Wallace & Gromit film later in the fall. Looking ahead, the company continues to expect to produce two features a year as well as occasional direct-to-video releases.
It's hard not to appreciate the operating leverage that a successful flick can give to DreamWorks. An incremental $100 million in box office receipts can translate into more than $300 million in additional gross revenue for the company. What's more, as the company has a sweetheart deal with DreamWorks Studios that charges them a below-average distribution fee, investors can share in even more of the gains.
That's not to say that there aren't meaningful risks, though. Obviously, a theatrical flop would be bad news, killing both the box office receipts and future home video/DVD sales.
There are also risks related to the corporate structure. More than 90% of the voting stock is controlled by Geffen and Katzenberg, so investors are essentially riding along in the back seat when it comes to making big decisions about the direction of the company. Additionally, investor Paul Allen has the option to trigger a sale of shares between April 2005 and May 2006, and up to 11% of the company's market cap could come up for sale.
Because the movie business is so erratic and profits can be "lumpy" from one year to the next, valuation is tricky, especially in the absence of cash flow information. Comparing the company with Pixar on a straight market cap basis is easy, but not necessarily helpful. Since Pixar is leaving its distribution partner Disney (NYSE:DIS) but has a better box-office track record than DreamWorks, it's hard for me to say where the stocks should trade in relation to each other.
Accordingly, I'm staying away for now. I don't doubt that one (or maybe both) will do quite well, but I just can't bring myself to buy what I don't know how to value.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
