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January 20, 2009

Dreamworks Animation is Relative Safety in Media

There seems to be no place in media to hide as estimates continue to fall and no signs of recovery in advertising or other key revenue drivers is apparent.

One stock that largely avoids the potholes in media is Dreamworks Animation. The company is vulnerable on DVD sales but has no advertising exposure. In the next eight weeks DWA has several potentially positive catalysts.

First, 4Q08 earnings will provide a platform for discussing what could be a decent 2009 with rising estimates possible. 4Q results themselves may not provide a catalyst with slightly below expectations North American box office for Madagascar 2 ($180 million vs. $200 million expected) and risk to holiday DVD sales for Kung Fu Panda. I believe both of these issues are factored into street expectations.

As to 2009 expectations, the first positive is that Madagascar 2 is performing very well overseas. The film is at $380 million and probably has legs to cross to $400 million. This is very impressive given Kung Fu Panda's $415 million in a weaker dollar environment. 4Q08 international box office is reported in 1Q09 results. I think analysts may be underestimating international Madagascar 2 in their models.

The other catalyst is the March 27th release of Monsters vs. Aliens, the next film in DWA's release schedule. It is too early to get a read but clips of the film that have been shown to analysts were well received. Their will be a lot of discussion of 3-D related to this film. It is already clear that the number of 3-D screens available will be far short of what was initially expected but I do not expect this to have a material financial impact. What is likely to be real is a pre-opening rally in the shares of DWA something that occurred regularly on past releases including Kung Fu Panda and Madagascar 2.

Posted by Steve Birenberg at January 20, 2009 08:53 AM in DWA