« CETV Sells 31% Stake to Time Warner Dramatically Improving Risk-Reward Trade-Off | Main | Trrying to Explain the Rally »

March 25, 2009

Monsters vs. Aliens Sets Up Two Way Trading in DWA

The next film from Dreamworks Animation (DWA) arrives in theaters on Friday. Monsters. vs. Aliens will easily be the #1 film this weekend and will drive the box office to very positive comparisons But for investors the more pertinent questions are whether the film has a strong enough opening to drive DWA shares higher or will it have a disappointing opening that sets up a good short?

I think the bar is set at $60 million for the opening weekend. Anything equal or greater will be positive for DWA shares. A figure below $55 million will probably be enough for the shorts to capitalize, especially as DWA has participated in the recent rally. I think a portion of DWA's gains this week are related to optimism about the movie which skews the immediate risk-reward slightly negative depending on the weekend gross.

Monsters vs. Aliens will be the first heavily marketed blockbuster focused on 3D animation. The film may roll out on as many as 7,000 screens of which 2,000 will be 3D. Theaters are expected to charge $2-5 extra per 3D ticket which will impact the grosses as 30% or more of the ticket sales could be 3D. At an average non-3D ticket price of $7 (lots of families at matinees), ticket sales could be 8.5 million. Add a $3 premium on 30% of those tickets and you could get an extra $8 million in box office receipts. Relative to the $60 million expectations bar that is enough to make the difference.

The opening is also important for DWA's long-term share price as the company is banking heavily on the revenue upswing from 3D. In addition, if Monsters vs. Aliens is a hit it cold become another franchise for DWA which means sequels, more merchandising and library revenue, and most importantly, greater earnings predictability.

I am not playing DWA on either side for Monsters vs. Aliens. I did get long unsuccessfully prior to Kung Fu Panda and Madagascar 2. Both films beat expectations but the weak market and collapsing DVD sales more than offset the box office upside.

Early reviews are positive (85% on Rotten Tomatoes after 13 reviews; UPDATE: 73% with 22 reviews) and the film has been massively marketed. I suspect the film will not fall short of the $55-60 million expectations bar but I don't expect a blowout either so if I do not expect an unusually large reaction in DWA sharse on Thursday and Friday or Monday after the grosses are known.

As mentioned, I think that risk is the stock should the film disappoint is greater than the reward for anything short of a massive blow out (greater than $65 million). As a result, if I had to put a trade on I would lean to the short side, especially if DWA shares firm up a bit more the next two days.

A few Northlake clients own DWA.

Posted by Steve Birenberg at March 25, 2009 10:38 AM in DWA