Is This Company Worth Your Money?

Shobha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When a movie like Shrek becomes a box office phenomenon it is easy to think all movies made by DreamWorks Animation (NASDAQ: DWA) are going to be like Shrek and provide an upbeat evaluation for that company. Then comes Flush away from the same studio, an utter box office flop and investors get scared and think DreamWorks days of making good movies are long gone. The truth falls somewhere in between these two extremes. As a value investor you probably realize that.

Strength, Weakness, Opportunity and Threat

DreamWorks’ strength lies in its creativity. It doesn’t produce many movies but tries to make quality movies and once in two years it releases five animated movies. It has a clean balance sheet and management that understands the entertainment business and the need for creativity.

An animation movie often takes 90 minutes to watch, yet takes 3 – 4 years to produce.  What makes a movie, or a song or a book a success is hard to predict. After taking 3 -4 years to produce an animated movie, that movie can become a box office flop in which case the capitalized expenses of making the film become impaired and written down. So making a couple of movies per year can be a double edged sword, if one becomes a flop the company’s bottom line may end up in the red.

Emerging markets’ appetite for 3D movies is awesome. DreamWorks Madagascar 3-Europe's Most Wanted, is an all time number one animated movie in Russia. It also started a joint venture in China. Through that joint venture it will make Chinese language animated and live action motion pictures and television programming, theme parks, live shows, etc.

In the past, making animated movies was hard, so there are few players who make quality animated movies like DreamWorks , Disney/Pixar – Disney, Sony Entertainment and Fox Entertainment’s Blue Sky Studios. However due to technological advancements in computer animation, that barrier to entry has come down. So the market could get flooded with animated movies.

 Current Situation

Last year there was an uncertainty with DreamWorks’ distribution agreement with Paramount – a subsidy of Viacom (NASDAQ: VIA) This August the company mentioned that it will go forward with Fox for its distribution. This year so far it released only one movie in the summer and it will release “Raise of the Guardian” during this November. Due to the Olympics, this summer was not good for movie business in general. The company is diversifying – recently it has acquired Classic Media which owns classic characters like Rocky & Bullwinkle, Casper, and Lassie just to name a few.

The company's Past stock price performance doesn’t say much, however the company hasn’t lost its creative edge and is not in financial ruins. So if you are considering for a long term investment, Dreamworks is worth considering.

bnshobha has positions in the stocks mentioned above. The Motley Fool owns shares of DreamWorks Animation. Motley Fool newsletter services recommend DreamWorks Animation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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