DreamWorks Animation (DWA), a producer of computer-animated movies that competes with Disney (DIS), News Corp. (NWS), and others, closed about a nickel away from the 52-week high on Monday. At $39.20, is the stock getting ahead of itself?
Possibly, but there's much to consider with this situation. Although I don't relish looking at stocks when they've already made a move, you have to give some credit to DreamWorks Animation and its film-franchise business model. Indeed, the company is creating valuable intellectual properties capable of spinning off future sequels for purposes of capturing cash flow. Not only that, but television is set to become a larger part of the business plan.
According to the Los Angeles Times, CEO Jeffrey Katzenberg thinks 2010 is going to be perhaps the best twelve-month period the company has ever had. Okay, such a proclamation from the mouth of a chief exec should almost automatically be dismissed -- especially when it comes from the mouth of a Hollywood chief exec.
Yet, institutions clearly are buying the DreamWorks Animation story. The stock wouldn't be where it is if they weren't. The most significant catalyst coming up, Shrek Forever After, set to be released in May, should be huge. Obviously, the movie business is hard to predict, but I'm sure most would agree Shrek is probably a better bet than most.
The other two cartoons coming in 2010, Megamind and How to Train Your Dragon, are not as guaranteed to dominate the multiplexes. Nevertheless, the studio is an experienced marketer of animated products, so I'm sure it will be able to extract some value out of the titles.
And as for television, DreamWorks Animation is expecting to book millions from shows such as Penguins of Madagascar. Also, one has to assume that merchandising opportunities will be a prime focus going forward.
Here's the bottom-line question: Should you buy DreamWorks Animation now, ahead of the new year, and in front of the upcoming Shrek onslaught?
Again, I think the stock is difficult to look at since it has already gained so much in terms of price. However, I also think there is room for the shares to move even further.
I would definitely say DreamWorks Animation should be considered at this point. Do a round of due diligence on it. However, keep in mind that institutions could start booking profits ahead of the film's release, so you want to be as ahead of the curve as possible. You probably will want to play the momentum by buying the pullbacks and averaging in. Shrek will be huge, but I would categorize DreamWorks Animation as a risky stock, since anything related to Hollywood is always a hit-or-miss affair.
Disclosure: I own Disney; positions can change without notice.
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