Dreamworks is in the news. First, Dreamworks SKG, the privately held, live action movie studio that is home to Steven Spielberg, is changing plans and will use Disney (DIS) as a distribution partner as opposed to Universal Pictures (owned by GE). Second, Dreamworks Animation (DWA), the publicly held animation company, was the subject of a lengthy positive article in the New York Times.
To clear up any confusion, SKG and DWA are completely independent with the exception of overlapping shareholders (Spielberg, David Geffen, and Jeffrey Katzenberg). The news stories about SKG have absolutely no impact on DWA.
The SKG news does matter to DIS, however. I think it could be a modest positive. DIS has sharply reduced its own productions to its core family franchise, both animated and live action. The SKG deal gives DIS another 5-6 adult films per year to distribute and brings the prestige of having Spielberg as a partner. Reports indicate DIS may invest up to $400 million in SKG which should be recouped profitably through the distribution fee (8-10% of box office). Usually these deals give the distributor payment off the top, directly from gross box office receipts, generally producing a modest but consistent profit stream. DIS is strong financially despite its cyclical and secular challenges so the company is in a position to invest while other studios (NWSA/FOX, Warners/TWX, Paramount/VIA, Sony, Universal/NBC) have parent companies who need to preserve cash. On last week’s conference call, CEO Bob Iger indicated DIS would its financial strength to invest and build the company for the long-term. SKG is not a huge deal but I think it is a good example of what Iger was referring to.
As for the article about DWA, I think it provides a balanced view that leans positive and supports my thesis that DWA is uniquely positioned among major media companies as insulated from the some, but not all, of the cyclical pressures currently buffeting the industry.
DWA reports on 2/24. Estimates have dropped sharply due to weak DVD sales at Christmas but I think the lagging performance of the stock reflects this fact. Slowing sales of tickets for Shrek The Musical on Broadway have also contributed to the lagging share performance. I think the earnings report and call will clear the stage for a rally into the March 27th release of Monsters vs. Aliens. Insider buzz on the film is good and the stock has rallied into movie releases in the past. I think DWA is a good long side trade in the current market environment.