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Author: Robear1020 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 185  
Subject: Why I think Dreamworks is a Screaming Buy Date: 6/1/2005 7:57 PM
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Here are a few reasons that the Motley Fool has given this year for taking a close look at investing in Dreamworks followed with a few reasons why I consider Dreamworks (DWA) to be a “screaming buy” at its current price.
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May 11, 2005 – (DWA @ $32.05) Steven Mallas: “I think the long-term future of DreamWorks Animation still holds the potential for good returns”

May 2, 2005 – (DWA @ $37.60) John Reeves: “DreamWorks Animation (NYSE: DWA) is committed to providing two films a year that will be entertaining to both adults and children -- without parents having to anticipate when to cover their kids' eyes. In this particular sense, DreamWorks Animation is definitely a Rule Breaker… DreamWorks Animation has the creativity and products to perform extremely well over the next few years. The company is now committed to focusing solely on CG animation. It has already made four films in this area, with overall revenues from the box office and home video sales well over $2 billion. Shrek was wildly successful, and Shrek 2 almost doubled the sales of the original. The pipeline of future films is particularly promising. I've mentioned Madagascar, which uses voice-overs by such Hollywood luminaries as Ben Stiller and Chris Rock. Shrek 3 is in the pipeline, as is a Jerry Seinfeld project called Bees. Can you really imagine a scenario in which any one of these films falls flat? I'm no Roger Ebert, but I'm going to go out on a limb: All three will be huge hits. When you factor in the box office take, DVD sales, and promotional tie-ins, each project has the potential to bring in $1 billion. So regardless of the competition, DreamWorks Animation can expect to be rolling in you-know-what in the near future… Rule Breakers are the top dogs and first movers in important, emerging industries. For this reason, Pixar is the Rule Breaker here. But that was then and this is now. Pixar's throne is being challenged by a company with arguably just as much savvy and potentially more resources. While I'm not quite ready to call DreamWorks Animation a Rule Breaker, I think the company has excellent prospects in the near future. Actually, both companies should do very well, and it might defy conventional wisdom to invest in both of them. It might be extremely profitable to do so as well.”

March 24, 2005 – (DWA @ $39.54) Rick Aristotle Munarriz: “So what do you get when you cross a promising stock and a likely dip in earnings come 2005? That's right, you get a buying opportunity. Shrek 3 will come out in 2007 and the Puss in Boots spin-off will follow a year later. The company has an ambitious release schedule of two new releases a year -- far more aggressive than Pixar's (Nasdaq: PIXR) 18-month gap between releases. While some may argue that DreamWorks will be sacrificing quality in the pursuit of quantity, I disagree. It's done well so far and its chances of landing another Shrek franchise or two -- which would make last year's $4.05 per share profits appear to be a peasant's pittance -- improve with the company's bold release schedule.”

March 18, 2005 – (DWA @ $39.70) Stephen D. Simpson: “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”
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Okay, I started following TMF articles on Dreamworks when it was near $40, I finally bought when it was near $32, and now that it is below $30 I am wondering why someone has not stood up and proclaimed it a “screaming buy”. I realize that analysts and investors are less than excited about the “tepid” opening of “Madagascar”, yet I believe that needs to be put in context. First “Madagascar” went head to head against a box-office behemoth “Revenge of the Sith”. The Sith has broken nearly every box office record ever set so it does not surprise me that it was the number one rated movie for two weeks in a row. Regardless, the Sith made approximately $70 million, The Longest Yard made approximately $59 million and Madagascar made approximately $61 “in four days”. These are very impressive numbers considering that their nearest competitors “Monster-in-Law, Hitchhiker's Guide, Kicking and Screaming, Crash, The Interpreter, Unleashed, Kingdom of Heaven, House of Wax” and many others have taken weeks to earn nearly as much money.

The weekend was pretty telling for me. On Friday night I took my son to a late showing of “Madagascar”. After 8 p.m. there were three theaters showing the film and each had a significant line of parents and children. During the film I couldn't help comparing it to Pixar's films, it was quite a bit weaker yet it still had plenty of laughs and my son loved it. Afterwards I asked my wife what she thought and she told me that she really enjoyed it (in other words it made her laugh a lot). On Sunday, I went to church and was surprised when the associate pastor used Madagascar as part of her mini sermon for “the children”. She started by asking the children how many of them “went to see Madagascar this weekend”. To my surprise, my son was the only one with his hand raised. She then asked them “how many went to see Star Wars this weekend”. To my surprise every single child except my son went to see Star Wars “this weekend” (I was very surprised because all of the children were under 10 and SW is PG13). She then went on to compare life in the zoo to human life on earth and life in Madagascar to being like life in heaven and recommended Madagascar as a funny, enjoyable film that they should all see. It appears that a lot of families saw Star Wars over the weekend; hopefully many of them will return to see a better “family film” over the course of the next few weekend.

From what I see, Madagascar has very good potential to pick up some summer-time-legs and take both its box-office numbers and Dreamworks much higher. The potential that "a summer time animated release" has is why Dreamworks released Madagascar at this time, it is why Pixar released Nemo over the Memorial Day weekend, and it is why Shrek2 was released at this time of year. It may also be the reason that Disney and Pixar agreed to push Cars to the summer of next year. Most family films (films for both parents and children) released at this time of the year have much greater box-office potential than shows released in the fall. If you don't believe me, consider this: Finding Nemo made only $70.3 Million over its Memorial Day opener and went on to be Pixar's most successful film "to date". Apparently, when children are out of school for the summer break they are more likely to take in repeat viewings of their favorite films (This is why I am certain Madagascar will blow away Shark Tale's box office numbers over the next few months).

IMHO, today's stock price of near $30 is a “screaming buy”, investors should not be discounting Dreamworks (DWA) based upon analyst recommendations. The analysts that follow Dreamworks are the same that follow Pixar and most of them have built their careers while giving poor box office estimates (FYI, most of them recommended selling Pixar right after each and every film released, if I had followed their advice I would have never held shares of Pixar).

Good luck to all Dreamworks investors,

Take care,

Robert
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