Dreamworks (DWA) Reveals Four-Year Plan
Dreamworks originally started out putting out one film per year. When they spun off in 2004, they were at two films per year, and in 2009 they aimed to start hitting five films every two years (so 2.5 films per year). Now they’re aiming for three films a year.
I think this is huge. Why?
1) The animated movie industry is an oligopoly. The producers (DWA, Fox’s BlueSky, Disney’s Pixar and Disney) tend to announce their distribution dates and spread them out far, far away from each other. In general, they won’t release within three weeks of each other, and they try to target bigger cushions. This way, each movie can receive the full attention of families when it gets released. If you follow the industry, you’ll note multiple articles with a line that says something like this “originally scheduled for November 9, DWA pushed the movie up a week to November 2 to avoid competition with Disney’s movie being release Nov. 25″ or something along those lines. By striking early, DWA can lay claims to prime spots.
2) Dreamworks should get a decent amount of operating leverage from this. Here’s their 2007 income statement (when they still did two movies per year):
Now here’s their 2011 income statement:
Two things jump out at me here- despite nearly doubling revenue from 2006 to 2007, SG&A went up approximately 33%. And despite adding an extra 0.5 movies per year from 2007 to 2011, SG&A barely budged. To me, that says there’s a good deal of operating leverage in DWA. While it’s not a huge amount (the cost of film production definitely outweighs overhead), it’s enough that another movie could make a huge difference.
3) Given the new agreement with Netflix, adding new movies is almost a “heads I win, tails I don’t lose much” type bet. Why? Because Netflix is paying them $30m+ per film already. It only costs DWA $150 million to produce a film. Given that Netflix agreement and the operating leverage in the business, it’s tough to not see them breaking even on each of these new films.
4) But most importantly, I think it’s a huge positive because I want Dreamworks investing in new movies. As I just mentioned, it costs $150 million to create a movie. While any individual movie could bomb, I think Dreamworks on the whole creates tons of value with each new film. This announcement means they’re investing an additional $75 million per year into film making, or approximately 5% of today’s market cap. I think they create value when they make movies, that’s a nice additional bit of value creation from today’s prices.
At today’s price of approximately $17.65, DWA is trading slightly below the level they were at one month ago, before they announced 1) their Fox distribution agreement, which has better overall economics than their previous deal and 2) (obviously) their intent to add an additional movie per year. I continue to think they represent outstanding value for long-term investors at today’s prices.
Disclosure- Short DWA March 2013 $17.50 puts