Puss Slays the Naysayers as DreamWorks Animation (DWA) Soars

Shares of DreamWorks Animation (DWA: Charts, News) made a snap recovery last week after its new animated feature, the Shrek spin-off "Puss in Boots", topped the U.S. box office for two weeks in a row. Ticket sales only declined 3% in the second week, substantially higher than most movies, which normally post a drastic decline in the second week.

Solid reviews and positive word of mouth have also helped the film, which stars Antonio Banderas as the former Shrek feline sidekick. Wall Street had previously been bearish on DreamWorks after its lower-than-anticipated first week results of $34.1 million, which missed analysts' expectations between $40 to $45 million. DreamWorks attributed the soft opening to poor weather conditions in the Northeast as well as the World Series keeping most families indoors. DreamWorks worldwide marketing chief Anne Globe explained, "We always had a two-weekend launch strategy for 'Puss in Boots.' To have this strong of a hold is pretty unprecedented, and it's a testament to how much audiences loved the movie." Daily Chart
If you are not able to see the chart, your email client probably does not support javascript. To view it, please click here "Puss in Boots" may mark a turning point for DreamWorks Animation, which had long been mocked as "the poor man's Pixar" - churning out moderately successful computer animated movies lacking the soul of Disney's (DIS: Charts, News) Pixar features. DreamWorks Animation's' primary franchises include Shrek, Kung Fu Panda and Madagascar. The Glendale, California-based company was spun off through a merger between DreamWorks and Pacific Data Images in 1997, and has produced 23 feature films. Its films are currently distributed by Paramount Pictures, a subsidiary of media giant Viacom (VIA: Charts, News), which acquired the DreamWorks' live action studio in 2006 before spinning it off again in 2008. Prior to the positive news regarding "Puss in Boots", DreamWorks had struggled to retain investors after its weak quarterly earnings. The company reported a 50% decline in income year-over-year, from $39.8 million to $19.7 million. Its revenue also dropped 15% from $188.9 to $160.8 million. Despite this plunge, DreamWorks's EPS of 23 cents managed to beat the Street consensus of 20 cents per share. Investors were hoping that "Kung Fu Panda 2" would reverse the company's lagging fortunes, but it failed to impress. The film earned $663 million globally over the summer, a weaker showing than the previous summer's hit, "Shrek 4", which raked in $752.6 million. Poor reviews for "Shrek 4" have kept the franchise shelved for the time being, and have led analysts to question the company's future growth potential. Analysts believe that DreamWorks Animation is hitting a growth bottleneck, unable to expand beyond its current franchises and "Pixar Junior" image. As such, DreamWorks shares have been on a steady decline since February 2010, when it hit an all-time high of $43.46. CEO Jeffrey Katzenberg has suggested that its current distribution deal with Paramount limits the company's true growth potential, stating that the company will "evaluate a wide range of options" after its current deal expires in 2012. The company is considering self-distribution, which would cut out the middleman, following comic book and movie giant Marvel's example prior to being acquired by Disney. "The real issues about self-distribution are not the theatrical part of the business," stated Katzenberg, "They are to the marketing side of it, they are to the home video, they are to the international marketplace. There are a lot of very complex and challenging issues to self-distribution -- all of which I think are very clearly understood by us." DreamWorks also recently hired former Disney theatrical distribution chief Chuck Viane as a consultant, hinting that self-distribution and faster growth may very well be in the cards. Katzenberg also stressed that the market for 3D films, especially in IMAX (IMAX: Charts, News) is strong, and will continue to feed theatrical profits. He also reminded analysts that the company's films - which also include home video, free and pay TV - have generated $10 billion in five years. Shares of DreamWorks Animation currently trade at 14.6 times forward earnings, but its PEG ratio of 7.2 suggests that analysts and investors are worried about its long-term growth. Other News About DWA "Puss in Boots" kicks Dreamworks shares higher Puss in Boots surprises moviegoers, investors and analysts. Lower DreamWorks Earnings Still Beats Expectations A look back at DreamWorks' earnings. Other Stocks in the News Viacom, Time Warner Cable iPad Dispute Heats Up Things get ugly between Time Warner and Viacom. Disney, YouTube in original content deal Disney inks a deal with YouTube - what does this mean for Hulu? Copyright 2011 by InvestorGuide.com, Inc. 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Published on Nov 17, 2011
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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