Is DreamWorks Stock A Good Buy?
Every time I go to the movie theater I feel like I’ve been robbed. 10 bucks for a ticket, 7 bucks for a soda, another $7 for popcorn… For two people to enjoy a night out, you’re talking at least $40. And, that doesn’t include a glass of wine or a nice dinner!
We’ll, I’ve found a way to make money at the movies (and no, it’s not scalping tickets). Just keep reading and I’ll tell you all about it.
Ever since I was a little kid, I’ve been awe struck by the movies.
I know it’s all because of my Uncle John. He would visit our family once or twice a year. As a treat, Uncle John would take me and my brothers to the movies… it was his thing. We loved going with him. Not only because we enjoyed the films, but because Uncle John always made us laugh.
He used to joke the movie we’d be seeing was “The History of Dental Floss.” (Clearly it was much funnier as a kid.)
Of course Uncle John did it up right. You couldn’t watch a movie without having popcorn and candy and soda… stuff my parents would never buy us. I still remember those adventures fondly.
Anyway, Uncle John’s love of the movies rubbed off on me.
As a matter of fact, this weekend Linda and I went to a movie. You’d never guess which one. Not the romantic comedy or the action adventure. Nope. We went to see the animated film, Monsters vs. Aliens.
We were going to take my nieces and nephew (I wanted to try out that history of dental floss joke). Unfortunately another family member offered to take them. So, Linda and I went alone.
I’ve got to admit, it’s a little strange going to a movie targeted at the kids crowd.
Still, you could sense the excitement in the air. These kids were excited to see the movie. Some could hardly contain themselves (especially those all jacked up on sugar). I couldn’t believe the number of people in the theater. It was packed. We got there 45 minutes early and had to stand in line to get in.
What a great business.
That’s when I realized somebody was making money hand over fist.
After a little digging (ok, all I did was watch the opening credits), I discovered DreamWorks Animation (DWA) had produced the film. DreamWorks is a publicly traded company, and a very interesting one at that.
The company went public at around $40 a share a few years back. In late 2007 and mid-2008 the company traded in the low $30s. Today you can pick up this stock for just over $20.
I wasn’t sure if the company was a bargain at these levels or just poised to fall lower, so I took a closer look. Might DreamWorks be a great investment opportunity hiding in the movie theatre?
DreamWorks is a media company. And that industry’s been hard hit by the economy. Unfortunately entertainment is one of the first things to go when families start belt tightening.
However, DreamWorks is a little different. They focus almost exclusively on content… not on the advertising many big media companies so heavily rely on.
I’m sure you’ve seen one or two of their movies.
Maybe Madagascar, or Kung Fu Panda, Shrek, or maybe even Monsters vs. Aliens? These products are much bigger than just the movie. This is what blew me away with their business.
The movie is just one small part.
They’re already thinking about the sequel, the sequel to the sequel… or in the case of Shrek, the 4th movie in the series.
They then start working on the Broadway shows, TV specials and series (like Christmas and Halloween specials), online worlds, theme parks, and live entertainment. Every one of these projects drives even more revenue to the company.
The Holy Grail of course is merchandising… not to be outdone by home video.
Consider this. My nieces and nephew each have their own DVD case. Of course it has their name on it. And each one is loaded full with movies. More than ten each! And they don’t duplicate each other… they have to share. Think about how much money parents spend every year on DVDs just for their kids.
It’s a money machine.
How big? Just this weekend, Monsters vs. Aliens generated more than $58.2 million. Now, I realize they don’t get to keep all the box office proceeds. But, their cut is still a big chunk of change.
So, how is the company performing?
The most recent financial info is for the year end of 2008. (Their next earnings release is on April 28.) Obviously 2008 was not a good time in the economy. Still the company generated $650 million in revenue and net income of $142 million.
2009 is looking good. Driving revenue are two new movies, Monsters vs. Aliens (which is doing well) and Madagascar 2 (a sequel to a successful movie).
Now, they’re not just frittering away their profits. Last year the company bought back $185 million in stock, and they have plans to buy another $50 million in 2009.
Some very impressive numbers if you ask me.
Now, the company freely admits they have a roller coaster business. When they hit a winner, they hit it big. Movies like Shrek can generate huge returns. Other “average” products produce a good return, but don’t throw off the same profits.
If you understand the volatility, as an investor, it can play into your hands. You can buy the stock on a dip, believing the next product launch will push it into the stratosphere.
Long term, DreamWorks is developing a great franchise. As they roll out more products, the stock should move significantly higher.
Oh, by the way, if you haven’t seen the movie yet, grab your kids and go. You’ll enjoy it as much as they do.
Category: Stocks
