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.