The weak action yesterday in Dreamworks Animation (DWA) following the better than expected opening of Madagascar 2: Escape 2 Africa led me to buy DWA shares again for a trade. I am looking to for a move north of $30 assuming the film continues to track toward greater than $200 million domestically. The prior trade in DWA culminated with a very small loss when the shares were sold last summer just over $30.
The next catalyst for the shares will be second weekend box office. The two most comparable films are Madagascar and Kung Fu Panda. Madagascar 2 opened at $63 million, ahead of $60 million for Panda and $47 million for Madagascar. Panda and Madagascar opened on 6/8/08 and 5/29/05, respectively, so the summer run is not necessarily comparable as kids were out of school. As a result, it would be bullish for DWA shares if Madagascar 2 holds better than the other two films which fell by 40-44% in their second weekend.
Besides potential upside other positives exist for DWA. First, I’d expect analysts to reiterate buy recommendations after the big opening weekend followed by a decline in the shares. Second, the Panda DVD hit stores yesterday. Third, Shrek the Musical is opening on Broadway. If each of these items works positively the shares should respond especially flowing better than expected 3Q08 results announced at then end of October.
One last point is that DWA is a media stock with ZERO exposure to advertising. This makes it a good place for dedicated media investors to hide.