Is DreamWorks Stock A Good Buy?
The Dynamic Wealth Report
March 30, 2009
Making Money At The Movies
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.
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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.
I took a quick look at their stock.
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.
• Gambling Industry (Down 26%)
In the last few months, the gambling industry has taken it on the chin.
The near collapse and rumors of bankruptcy by MGM certainly haven’t
helped. Leading the industry lower are companies like MGM, IGT, and the
Las Vegas Sands.
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