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Published: June 15, 2010
The entertainment industry is always trying
to attract people's attention in order to get a piece of their
discretionary income. For investors, that's a great thing,
especially if it's income consumers want to spend because it
involves their kids.
For the entertainment providers, it's meant a king's ransom.
Revenue for successful family films generally far surpasses that
of other movies. And what's more, movies in general are
recession-proof -- family films in particular.
All of this revenue translates to huge stock returns. Investors
who got in on Pixar when it went public made 50 times their
money after Disney purchased the company.
DreamWorks Animation SKG (NYSE: DWA) does just one thing,
and in recent years, the company has been doing it increasingly
better. It makes animated movies, mostly for the theatre, where
parents have found it generally difficult to spend money on a
family outing. There just aren't that many family-friendly films
made, despite clear evidence that these films are the most
profitable type of movies to make.
Whether or not you have kids, you've probably heard of most (if
not all) of DreamWorks' movies. That's because the company is a
marketing juggernaut. This should come as no surprise, since the
"K" in "SKG" stands for Jeffrey Katzenberg, the onetime
second-in-command under Michael Eisner at Walt Disney (NYSE:
DIS). Nobody knows how to market a kid's film better than
Disney, and Katzenberg never missed a beat after starting up
DreamWorks with partners Steven Spielberg and David Geffen.
The key to this kind of business goes beyond marketing. A
company can market all it wants, but if the product stinks,
it'll never go beyond piddling returns. At first, DreamWorks
films weren't that great, and the revenue generated was strong,
but not stellar like Pixar films. The first few ventures,
Antz, The Prince of Egypt, The Road to El Dorado, Spirit:
Stallion of the Cimarron and Sinbad weren't flops,
but they didn't perform as hoped.
While some people will say that's due to the unpredictability of
the movie business, others will disagree. The truth is that the
success of a movie depends on how good the story is, and how
well it is executed. Critics certainly feel that more recent
DreamWorks films like the Shrek series, Kung Fu Panda,
Monsters vs. Aliens, the Madagascar films, Shark
Tale, and How to Train Your Dragon have been much
better. Anyone who has seen them would likely agree.
And let's not forget: the better the movie,
the larger the audience, the bigger the gross, the more
merchandise that gets sold, all leading to more revenue. These
better movies have led to worldwide gross revenue that has far
eclipsed the earlier pictures.
There are risks to DreamWorks as an investment. One just doesn't
know if the next film or the one after that will be any good.
However, the most recent spate of movies gives one much more
confidence than the initial releases. Also, keep in mind that
revenue is irregular with film companies.
What investors are betting on in this case, as they did with
Marvel Studios and Pixar, is the overall story. As such, it's
practically impossible to determine a "proper" valuation for the
company. Investors are buying into the idea that DreamWorks will
just continue to make a lot more money than it spends making
movies. Generally, it does, with profit margins in the 17% - 18%
range -- far above most traditional businesses. If pressed,
however, it is worth noting that at 14 times current earnings,
the stock trades well below the 35 or even 50 times earnings
where Marvel and Pixar once traded.
The company is on solid financial footing, with $235 million in
cash, $100 million of
free cash flow generated last year and no debt. Katzenberg
receives no salary. His compensation is entirely dependent on
the company's performance, which is something every shareholder
likes to hear.
Action to Take --> Buying
DreamWorks Animation for the long haul is a solid way to bet on
a pure-play in the entertainment sector. If the history of
Marvel and Pixar is any guide, a
buyout could be in the cards, and likely for as much as
three to four times the current stock price.
-- Frederick M. Steier
Contributor
StreetAuthority |
