Stock talk for the main street investor.
Mar 29 2010

Today – Buying Dreamworks

I bought a small amount of Dreamworks (DWA) on Friday after I got scared the stock wouldn’t stop going up. My reasoning was, if How To Train Your Dragon came out with good numbers and the stock went up I would be happy with a gain on my small position. If the stock dropped I would be able to scoop up more shares and bring my average cost down. The latter happened today after Wall Street was disapointed with $43.3 million in box office during opening weekend.

I was more concerned about the reaction from movie goers and the long term effects on Dreamworks. So far, so good. Reviews are outstanding from critics and movie goers. The 3D is apparently outstanding and the story line is good as well. Expect the word to spread through elementary schools like wildfire.

I could go into why a “disappointing” opening weekend by Wall Street standards doesn’t mean anything but I’ll leave you with one thought on how much I trust those idiots. Avatar had a “disappointing” opening weekend. That turned out OK.

Disclosure: Author is long DWA.

Mar 23 2010

Why Ford Scares Me

Ford (F) has had quite a run over the last year. The stock has risen from $2.51 to $13.90 because of the remarkable turnaround Alan Mulally has engineered. The sales organization is more efficient, cars are more stylish and the union has made concessions without going into bankruptcy like GM.

As impressive as this is I’m worried about Ford’s continued success. Last year, their first profitable year in four years, they only operated with a 2.3% net margin. As a result there is very little margin for error in their operations. Even the profit Ford had wasn’t all that surprising with 83% of profit occurring during the cash-for-clunkers quarter.

To find a year that gives indications Ford can be a $45 billion company you have to go back to 1998 when gas was about $1/gallon, Explorers were flying out of showrooms and Ford was raking in money on financing. A lot has changed since then.

I’m not calling a fall in Ford’s stock but I am pointing out the risk involved in owning Ford. All might be rosy right now but one bad accelerator could put them on an entirely different path.

Disclosure: Author has no position in Ford (F).

Mar 8 2010

Can You See 3D?

Alice in Wonderland made $116.1 million in it’s first weekend and the IMAX explosion continued it’s strong performance with $15 million of that. It appears that 3D and IMAX will be real main stays in this summer’s box office which is a good sign for Dreamworks, who has two movies opening this spring.

Dreamworks (DWA) beat earnings estimates by 36% in the December quarter and after a 2009 with very few product launches 2010 is set up to be much better. How to Train Your Dragon has very low expectations so will likely only surprise on the upside. The last Shrek movie will complete this franchise in theaters but spin off products like a theatre show are now launching.

Dreamworks has shown the ability to develop creative movies and their push to adopt new technologies quickly give them an attractive position in the film industry. Also attractive are their relatively low cost productions. An animated film, unlike a major motion picture, doesn’t pay actors large fees or a percentage of revenue. This gives all of the up-side to the studio itself. With an expanding customer base internationally and increasing ticket prices for 3D movies this upside is potentially huge in coming movies.

The fast adoption of 3D gives Dreamworks more revenue from each customer to the tune of $2-3. This additional revenue comes from a fairly small investment in the case of an animated film. If you’re already digital, how hard can it be to convert to 3D? These higher prices reduce the risk of a flop in the box office since less customers gives you the same revenue.

Valuation is reasonable at 24 times current earnings and 15 times next year’s projected earnings. Analysts have been raising estimates recently and I believe there’s still upside in 2010 and especially 2011 when more movies are due out. Dreamworks has beaten earnings soundly each of the last four quarters, which tells me the analysts don’t know what to do with this stock.

Disclosure: Author does not own any DWA but may in the very near future.