Spring has turned muggy for Jeffrey Katzenberg and DreamWorks Animation (DWA:NYSE - commentary - research), but investors might do well to peer past the haze hanging over the animation studio.
Last month the Glendale, Calif., company shocked Wall Street with a steep earnings disappointment that damaged management's credibility. Investors responded by filing class-action suits and selling DreamWorks stock in droves. This week the onetime highflier slipped below last fall's IPO price for the first time.
Adding to DreamWorks' chagrin, rival Pixar (PIXR:Nasdaq - commentary - research) is on a huge winning streak. Steve Jobs' studio is churning out winning films just as it prepares to negotiate a new distribution deal that could draw interest from media bigwigs all over the world. Fans remain riveted by the prospect of a new deal with current partner Disney (DIS:NYSE - commentary - research).
In the meantime, analysts and investors are doubting DreamWorks from every angle. Sander Morris Harris media analyst David Miller lowered his targets for the animation studio Monday, trimming his views for Madagascar's domestic box office sales and slashing quarterly earnings expectations to 14 cents a share from 21 cents.
Miller, whose firm maintains a hold rating on the stock, cut its 12-month target price on the stock to $34 from $39.50. He says Madagascar had a "tepid opening weekend" and following two weeks, causing the firm to cut its "domestic theatrical gross assumption" for Madagascar to $195 million from $250 million.
The larger problem, which Miller broadly characterizes as "just the latest in what has become a series of unfortunate -- if not generally bizarre -- events for the company since going public a mere two quarters ago," is that DreamWorks shot itself in the foot leading up to a $500 million secondary offering. The release of Madagascar was supposed to propel a now-delayed offering designed as payback for Microsoft (MSFT:Nasdaq - commentary - research) Founder Paul Allen. Miller says that holding off on the offering could be seen as an admission of Madagascar's failure.
Marla Backer, media analyst at Soleil Securities Group, acknowledges the company was too hyped up around its initial public offering and that the pendulum has swung the other way. She says executives now have a "credibility problem -- some of it warranted, some of it not."
Backer, however, is mystified by criticism of Madagascar's showing. The movie has done well enough that DreamWorks could seriously look at a sequel, she says. Backer adds that the movie beat her estimates for opening weekend and that the company had been clear about it not being a Shrek-sized smash prior to its release.
"It has done what it was supposed to do," one DreamWorks insider says of Madagascar. When the film goes into wide release in Europe and beyond, the numbers are likely to justify building some kind of franchise stemming from the picture. DreamWorks is supposedly spinning off the Puss n Boots character from Shrek 2 and could do something similar with this film, if not create a sequel.
The broader problem for DreamWorks has little to do with the middling success of Madagascar in the three weeks since its release, though. It has much more to do with a secondary offering and an unhealthy comparison with Pixar, which seems to be batting a thousand lately.
Katzenberg, however, may catch a break when Pixar and Disney talk in earnest over their distribution agreement, which is set to expire with the release of Cars next spring.
Jobs clearly wants a Lucasfilm-style agreement allowing Pixar to keep rights to profit off all the various windows for its films. That would unwind the 50/50 split Disney now enjoys and force pay Disney or someone else a straightforward distribution fee.
Backer sees a lot of benefits for both companies coming to a new agreement. "I feel Disney has a leg up in terms of distributing family films," she says.
There are a couple of elements, though, that could make it difficult for the two companies to come to terms. One is that, according to Miller and others, Disney hasn't really been a creative partner to Pixar since Toy Story 2. The second is that News Corp. (NWS:NYSE - commentary - research), Sony (SNE:NYSE ADR - commentary - research) or Time Warner (TWX:NYSE - commentary - research) all could handle Pixar's distribution needs, contrary to popular belief. The third factor is that Disney has no fewer than four animated films in the pipeline itself. Still, Backer sees this as a red herring, noting the companies could arrange release dates so that they don't conflict.
Perhaps the largest advantage DreamWorks holds over Pixar is that it owns its characters outright, a "huge, huge advantage," according to Backer: "The fate of their franchises is in their hands." While DreamWorks is responsible for its failures, it also controls the destiny of its successes. For now, Pixar can't say the same.
Plus, no one bats a thousand forever. If Cars stalls, the near-term game is wide open. DreamWorks has a very healthy two-year cycle ahead of it, including Bees, Over the Hedge, Wallace and Grommit, Puss n Boots and the Madagascar spinoffs. That will be topped off with a green slimy neutron blast commonly known as Shrek 3 in 2007.
Pixar remains the market leader, but forgetting about DreamWorks now could be penny-wise, pound-foolish.
Last month the Glendale, Calif., company shocked Wall Street with a steep earnings disappointment that damaged management's credibility. Investors responded by filing class-action suits and selling DreamWorks stock in droves. This week the onetime highflier slipped below last fall's IPO price for the first time.
Adding to DreamWorks' chagrin, rival Pixar (PIXR:Nasdaq - commentary - research) is on a huge winning streak. Steve Jobs' studio is churning out winning films just as it prepares to negotiate a new distribution deal that could draw interest from media bigwigs all over the world. Fans remain riveted by the prospect of a new deal with current partner Disney (DIS:NYSE - commentary - research).
In the meantime, analysts and investors are doubting DreamWorks from every angle. Sander Morris Harris media analyst David Miller lowered his targets for the animation studio Monday, trimming his views for Madagascar's domestic box office sales and slashing quarterly earnings expectations to 14 cents a share from 21 cents.
Miller, whose firm maintains a hold rating on the stock, cut its 12-month target price on the stock to $34 from $39.50. He says Madagascar had a "tepid opening weekend" and following two weeks, causing the firm to cut its "domestic theatrical gross assumption" for Madagascar to $195 million from $250 million.
The larger problem, which Miller broadly characterizes as "just the latest in what has become a series of unfortunate -- if not generally bizarre -- events for the company since going public a mere two quarters ago," is that DreamWorks shot itself in the foot leading up to a $500 million secondary offering. The release of Madagascar was supposed to propel a now-delayed offering designed as payback for Microsoft (MSFT:Nasdaq - commentary - research) Founder Paul Allen. Miller says that holding off on the offering could be seen as an admission of Madagascar's failure.
Marla Backer, media analyst at Soleil Securities Group, acknowledges the company was too hyped up around its initial public offering and that the pendulum has swung the other way. She says executives now have a "credibility problem -- some of it warranted, some of it not."
Backer, however, is mystified by criticism of Madagascar's showing. The movie has done well enough that DreamWorks could seriously look at a sequel, she says. Backer adds that the movie beat her estimates for opening weekend and that the company had been clear about it not being a Shrek-sized smash prior to its release.
"It has done what it was supposed to do," one DreamWorks insider says of Madagascar. When the film goes into wide release in Europe and beyond, the numbers are likely to justify building some kind of franchise stemming from the picture. DreamWorks is supposedly spinning off the Puss n Boots character from Shrek 2 and could do something similar with this film, if not create a sequel.
The broader problem for DreamWorks has little to do with the middling success of Madagascar in the three weeks since its release, though. It has much more to do with a secondary offering and an unhealthy comparison with Pixar, which seems to be batting a thousand lately.
Katzenberg, however, may catch a break when Pixar and Disney talk in earnest over their distribution agreement, which is set to expire with the release of Cars next spring.
Jobs clearly wants a Lucasfilm-style agreement allowing Pixar to keep rights to profit off all the various windows for its films. That would unwind the 50/50 split Disney now enjoys and force pay Disney or someone else a straightforward distribution fee.
Backer sees a lot of benefits for both companies coming to a new agreement. "I feel Disney has a leg up in terms of distributing family films," she says.
There are a couple of elements, though, that could make it difficult for the two companies to come to terms. One is that, according to Miller and others, Disney hasn't really been a creative partner to Pixar since Toy Story 2. The second is that News Corp. (NWS:NYSE - commentary - research), Sony (SNE:NYSE ADR - commentary - research) or Time Warner (TWX:NYSE - commentary - research) all could handle Pixar's distribution needs, contrary to popular belief. The third factor is that Disney has no fewer than four animated films in the pipeline itself. Still, Backer sees this as a red herring, noting the companies could arrange release dates so that they don't conflict.
Perhaps the largest advantage DreamWorks holds over Pixar is that it owns its characters outright, a "huge, huge advantage," according to Backer: "The fate of their franchises is in their hands." While DreamWorks is responsible for its failures, it also controls the destiny of its successes. For now, Pixar can't say the same.
Plus, no one bats a thousand forever. If Cars stalls, the near-term game is wide open. DreamWorks has a very healthy two-year cycle ahead of it, including Bees, Over the Hedge, Wallace and Grommit, Puss n Boots and the Madagascar spinoffs. That will be topped off with a green slimy neutron blast commonly known as Shrek 3 in 2007.
Pixar remains the market leader, but forgetting about DreamWorks now could be penny-wise, pound-foolish.