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DreamWorks Animation (DWA) continues to post evidence that its business model of building animated franchises should be a robust driver of solid shareholder value. It isn't without risk, of course; when you're dealing with Hollywood, failure scenarios are a constant threat. For now, though, the company's fourth-quarter results, released Tuesday after the bell, show a studio with future promise.
It's true that the quarter itself didn't show growth. Revenues took a modest dip, and earnings per share dropped 14% to 50 cents. However, estimates indicated a much more pessimistic outlook at 37 cents per share. And for the twelve-month period, growth actually was produced, as net income rose 10% to $1.73 per share.
There are many thing to like about DreamWorks Animation. There's the recurring benefit from the film library. There's the potential in the television marketplace (two specials based on high-profile properties drove Q4's impressive revenue contribution from the TV segment). There are a couple upcoming projects that could be significant hits at the theater: How to Train Your Dragon and Megamind. And another project that just might bring in a sizable amount of cash to the coffers: Shrek Forever After.
Speaking of cash flow, net funds generated by operating activities declined 16% for the fiscal year, and since capital expenditures experienced a big jump, free cash flow took a hit. With three movies coming out in 2010, though, I'd have to believe cash flow will once again be on the upswing in future quarters.
DreamWorks Animation has many competitors. Disney (DIS), News Corp. (NWS), and other media concerns have exposure to computer-generated cartoons. But CEO Jeffrey Katzenberg has constructed a resilient stable of marquee characters that can keep up with what's going on in the multiplex industry.
So, fundamentally, I think the picture is bright for the business. What about the stock?
Well, it would have been nice if the stock had presented an opportunity to get in on the action. Unfortunately, the shares are still too stubbornly close to a 52-week high for comfort. Nevertheless, who doesn't want to own the company before the next Shrek release?
If you really want to play this stock, here's what I would suggest. You could buy it now, so long as you have cash on hand to willingly dollar-cost-average a better price basis. Also, you could have a stop in place to limit your losses. Whatever you do, perform your own due diligence, and understand that the choice is yours and yours alone.
DreamWorks Animation is a great company, and it could someday be bought out at an attractive premium. Being a Hollywood entity, however, does imply a quantity of risk. Tread carefully, even though all signs, in my opinion, point to further capital appreciation for the studio.
Disclosure: I own Disney; positions can change without notice.
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