Welcome to the pep-up edition of Gene Scallop’s entertainment report. Here’s what’s topping today!
We’ve got Cartoon Network’s first ratings report and its schedule improves again ever since the last report as it continues to top Disney Channel as the best basic cable channel. Here’s what the network did:
Across the first week of January 2013, Cartoon Network ranked as television’s #1 network for Total Day delivery of boys 6-11, & 9-14, and #1 in Early Prime (7-9 p.m.) delivery of boys 9-14. Scoring double-digit delivery gains compared the same week in 2012, Total Day delivery of kids 2-11 grew by 20%, kids 6-11 by 33% and kids 9-14 by 33%.
Ranking #1 for boys 6-11 & 9-14 vs. all other networks on Monday, Thursday and Friday Night (7-9 p.m.), Cartoon Network’s Friday night programming line-up grew target kids/boys demos by double digits across the board, ranging between 19% and 96% vs. the same week last year.
Saturday Morning (7-11 a.m.) animated action-adventure programming was up double digits across all key kids and boys vs. last year, ranging between 12% and 36%. Premiere episodes of original series Ben 10: Omniverse (9 a.m.), Star Wars: The Clone Wars (9:30 a.m.), Green Lantern (10 a.m.) and Young Justice: Invasion (10:30 a.m.) grew by double and triple digits across kids/boys 2-11, 6-11 & 9-14, ranging between 33% and 119%.
DreamWorks, the last time we looked at, was still suffering last year due to the Guardians disaster in the box office saying the future of the studio is very bleak. But Stan Jennings Fish says don’t count DreamWorks out just yet!
Stan Jennings Fish (via Seeking Alpha)- During the last fifteen years, DreamWorks has created some of the best and most memorable CG animated films of all time. For example, Shrek 2, which was released in May of 2004, is currently the highest grossing animated film of its kind, grossing over $560 million domestically (inflation-adjusted) and over $1 billion worldwide (inflation-adjusted).
The main problem that I have is with the company’s limited release schedule, a box-office flop could significantly impair annual earnings and cash flows. For example, a movie that bombs for a larger studio like Warner Bros. (TWX) is much easier to absorb given the high number of films released each years. Although, I do have to give management credit; it is trying to create more films per year. When DreamWorks was spun off back in 2004, it was producing two films per year. In 2009, it accelerated to five films every two years. More recently, the company announced that it will now do three films per year from 2013-2016. I believe that this larger annual release schedule is likely to create more stable financial results for the company.
Investors might notice that a good portion of the future release schedule is comprised of sequels. The company’s long-term goal is to release at least one sequel film every year. With an entrenched fan base, sequels are inherently less risky and provide the opportunity to generate additional profits through increased home video sales, merchandising, and licensing.
The first film that the company will release in 2013 will be The Croods. The story is about the world’s very first prehistoric family going on a road trip to an uncharted and fantastical world. The trailer looks amazing and I expect the film to do very well. Another movie that I am looking forward to is Turbo, which will be the company’s second release in 2013. This film is about a freak accident that might just help an everyday garden snail achieve his biggest dream: winning the Indy 500. The third and final film getting released in 2013 is called Mr. Peabody & Sherman. It is about a young boy and his dog, who happens to have a genius-level IQ, they spring into action when their time-travel machine is stolen and moments in history begin to be changed. The trailer is not out for this yet, but it sounds like it will be another excellent film.
Usually the opening week determines whether or not a film will be a success. Historically, the average DreamWorks release earned approximately $52 million, or 27% of its total domestic gross in the opening week. Additionally, the average DreamWorks film grosses approximately $500 million worldwide. If just one of these movies happens to be the next Shrek, it could gross over $1 billion worldwide. From what I have seen so far, there is a good chance of this happening. Overall, I expect the company to have a very good year in 2013.
Non-Feature Film Business
In recent years, DreamWorks has commenced a number of initiatives aimed at further capitalizing on its franchise film properties, such as Shrek, Madagascar, Kung Fu Panda and others. These business initiatives seek to diversify the company’s revenue streams by exploiting the film properties in other areas of family entertainment, including the following:
Television Specials and Series
The animated television series, The Penguins of Madagascar, based on the company’s film Madagascar, debuted on the Nickelodeon network in March 2009. The company also has a television series called Kung Fu Panda: Legends of Awesomeness, which debuted on Nickelodeon in late 2011. The company’s newest series, Dragons: Riders of Berk, based on the company’s film How to Train Your Dragon, first aired on Cartoon Network in August 2012. The company is also bringing its Monsters Vs. Aliens film to the small screen with a new animated television show. So far 26 episodes have been ordered and should debut on Nickelodeon some time in 2013.
The company has also produced many half-hour television specials based on its films. Christmas specials include Shrek the Halls, Kung Fu Panda Holiday, and Merry Madagascar. Halloween specials include Monsters Vs. Aliens Mutant Pumpkins From Outer Space and Scared Shrekless.
Live Performances
From December 2008 until January 2010, the company’s Shrek the Musical ran on Broadway. The play is based on the Company’s 2001 theatrical release, Shrek. From July 2010 until July 2011, the company also operated a national touring production of the play. A separate production of the play opened in London in May 2011. During 2011, the company operated a live show in the United States based on the film Madagascar. The company is also currently doing a live show based on its highly successful film, How to Train Your Dragon and is developing a live show based on Kung Fu Panda.
Online Virtual World
The company’s online virtual world based on the film Kung Fu Panda became available to the public in March 2010. The virtual world is aimed at children ages seven through thirteen. The company currently realizes revenue from the virtual world through user subscription fees and advertising.
Chinese Joint Venture
In February of 2012, DreamWorks announced that it will create a China joint venture called “Oriental DreamWorks.” According to management, the purpose of the joint venture will be to create a leading China-focused family entertainment company engaged in the acquisition, production and distribution of original content originally produced, released or commercially exploited in the Chinese language for China and, as agreed upon by the partners, for the rest of the world. The joint venture will encompass animated and live action motion pictures and television programing, an interment distribution platform, live shows, theme parks, animation parks, mobile, online, interactive games and related consumer products. The business of the joint venture will be conducted in China, with the potential for expansion into such other markets in the world as may be approved by the board of directors of the joint venture.
So far things seem to be moving according to plan. In a recent article by Reuters, DreamWorks and its Chinese joint venture partners announced that they will open a theme park in Shanghai by 2016, with a total investment of over $3 billion. They will also cooperate to produce Kung Fu Panda 3, which should get released in early 2016.
In my opinion, the expansion into China makes economic sense. In the first quarter of 2012, China overtook Japan as the world’s second-biggest cinema market. China’s film industry is growing at an astonishing rate. For example, China added on average eight screens per day in 2011. No nation in the world grew at that fast pace. Despite its rapid growth, China’s film industry is still largely untapped as the average Chinese person only goes to the cinema 0.3 times per year, compared with over five times annually in Iceland, the top movie-going country.
Business Acquisition
On August 29, 2012, DreamWorks completed its acquisition of Classic Media by purchasing all of the stock of its parent holding company, Boomerang Media Holdings. Classic Media is a global media company with an extensive portfolio of family-oriented television, film and publishing properties. Classic Media now operates under the brand name “DreamWorks Classics.” The company paid approximately $158 million in net cash consideration for this transaction. For the twelve months ended February 29, 2012, Classic Media earned net revenue of $82 million and operating profit of approximately $19 million. DreamWorks had to pay 8.3 times operating profit in order to acquire some of the most beloved cartoon franchises in history. The price paid was very reasonable, in my opinion. It is important to note, however, that there might be some complications in the future. For example, Classic Media does not own all of its characters outright so it might take a couple of years to get rights issues sorted out. However, I think this is only a minor setback and should not be a long-term problem for the company.
There are three main reasons why I believe DreamWorks made this acquisition. The first thing that the company plans on doing is to develop new adventures for this library of characters on the big screen. In fact, DreamWorks has already gotten started on a Mr. Peabody and Sherman movie, getting released in the fourth quarter of 2013. Furthermore, the acquisition of Classic Media’s extensive library revenue stream will support its ongoing diversification strategy. And lastly, this acquisition coincides with the company’s recent announcement of a DreamWorks’ themed amusement park, which I will talk about next, so maybe we will be able to see a lot of the characters walking around that park in the near future. There are also plans to start a DreamWorks branded channel in the near future. However, management has stated that it was too soon to say if the channel would be cable or digital, or in what part of the world it would debut. We should get more information on this in the next couple of quarters.
Theme Park
DreamWorks recently announced that it will open a theme park in New Jersey. According to management, at this time it will only be involved in this project by licensing the rights to its characters and storytelling. The “American Dream” mall would be the first wholly themed DreamWorks park. It would be the first theme park based on the studio’s animated movies since DreamWorks’s earlier plan for a park in Dubai failed to work out. The indoor theme park would include rides, attractions and a glass-enclosed wave pool incorporating characters from the studio’s movies. Dream World, a theme park in Australia, features some DreamWorks characters but not exclusively. The New Jersey theme park is set to open in early 2014.
Management
Jeffrey Katzenberg is DreamWorks Animation’s CEO and sits on its board. Before co-founding DreamWorks LLC (“Old DreamWorks Studios”) with Steven Spielberg and David Geffen in 1994, Katzenberg ran Disney’s motion picture division and was responsible for developing such hits as Who Framed Roger Rabbit (1988), The Little Mermaid (1989), Beauty and the Beast (1991), Aladdin (1992), and The Lion King (1994). Mr. Katzenberg has helped turn DreamWorks into one of the best animation studios in the world. Under Mr. Katzenberg’s leadership, DreamWorks became the first studio to produce all of its feature films in 3D and in 2010 became the first company to release three CG feature films in 3D in a single year. It would be difficult to name anyone better suited for this job than Mr. Katzenberg.
DreamWorks has two share classes with different voting rights, and members of the founding group still control more than two thirds of DreamWorks’ votes. Given this, outside investors have little say in what happens at DreamWorks. Currently Mr. Katzenberg controls approximately 15% of Class A common stock (including convertible Class B shares).
Risks
Piracy and shifting consumer preferences could severely weaken DVD sales, a major source of profits for all movie studios for the last decade.
Because of the company’s limited release schedule, a box-office flop could significantly impair annual earnings and cash flows. It is extremely difficult to forecast a movie’s performance before its release, especially for non-sequel movies.
The company currently derives substantially all of its revenue from a single source, the production of animated family entertainment, and the lack of a diversified business could adversely affect the company. For example, unlike DreamWorks, many of the major studios are part of corporate groups that include television networks and cable channels that can provide a stable source of earnings and cash flows that offset fluctuations in the financial performance of their feature films.
Animated films typically take longer and are more expensive to produce than live-action films, which increases the uncertainties inherent in their production and distribution. The typical DreamWorks animated film takes three to four years to produce after the initial development stage, as opposed to an average live-action film, which can be produced in less than one year. Additionally, the average budget for a DreamWorks film is $150 million, which is much higher than even that of a big-budget live action film.
A more near-term risk that investors should consider has to do with the company’s most recent theatrical release Rise of the Guardians, which so far has been a huge disappointment. The film cost about $145 million to make, and it has generated $260 million in global box office ticket sales since its debut in late November, well below that of a typical DreamWorks Animation movie. Before DreamWorks can make a profit on the movie, its distributor needs to recoup all its expenses plus pocket 8% for itself. That is the hurdle a DreamWorks movie has to clear before it even reports any revenue. Since the entire undertaking shared by the studio producing the movie and the distributor is approximately $300 million, DreamWorks will most likely be forced to record a large write-down next quarter. In other words, the company will report lower earnings than investors expect and the share price will most likely suffer because of it.
Financial Health
As of September 2012, the company had $131 in cash and $200 of outstanding debt. The company also has some operating leases (off-balance sheet), which amount to approximately $63 million when capitalized. Overall, DreamWorks’ financial health is solid.
Profitability
DreamWorks has not been the most consistently profitable company in the past; this is due to its limited film release schedule, which I said was one of the risks associated with investing in this company. However, as the company continues to grow its film library and as it continues to diversify its business operations, I believe this will change.
Valuation
DreamWorks is an extremely difficult company to value. The company’s past earnings and cash flow have been so inconsistent that it would be impossible to make any reliable projections. However, it is not necessary to make precise projections in order to know whether a company is attractively priced or not. First, I want to talk about the company’s earning power (historical owner earnings). The company’s ten-year weighted average owner earnings are approximately $59 million.
The company’s current enterprise value is $1.5 billion, which gives us an earnings yield of about 3.9% (owner earnings/enterprise value). If this is all we had to go on, DreamWorks would seem like it is overpriced. However, after spending countless hours studying this business, I believe the current price per share is a good entry point for long-term investors. I am very optimistic about the company’s future revenue opportunities both within and outside the United States. As I already mentioned before, the company will increase the number of films it releases annually. One extra film per year can make a huge difference for this company, even if it happens to be only moderately successful. Furthermore, the company’s growing film library, its diversification into other areas such as theme parks in China and the United States, the possibility of a DreamWorks branded channel, the various television series and specials, the live performances, and numerous other initiatives will ensure a more stable future revenue stream for the company. In other words, I expect this company to have significantly higher revenues and profit margins in the coming years, and I expect those revenues and margins to be more consistent than they were in the past. These two things will have a positive effect on the company’s share price.
My verdict…
With a stock price below $17 per share, DreamWorks is an extremely attractive investment for patient investors. The next few months are an excellent time to begin accumulating shares for a long-term position. Although, investors who want to minimize their potential losses should wait until after the company releases its annual report. I expect the company to report a substantial loss since its most recent film has been a disappointment at the box office. However, this is only a short-term setback for the company and I expect it to have a great 2013. In fact, this is one of my highest conviction picks for 2013!
Turning to TV news, Fox TV is preparing to take its Animation Domination block to late night. With some HD added, Johnny says the new late night block like the Sunday block, could be a new plan to increases its viewer ratings:
Johnny Trout (via The Wrap TV)- Fox will launch Animation Domination High-Def, a late-night offshoot of its Sunday night Animation Domination comedy block, on July 27, the network said.
The block, which will feature the voice talents of Mandy Moore, Ken Marino, Patton Oswalt and others, will run from 11 p.m. to 12:30 a.m. on Saturday nights.
The first season of Animation Domination High-Def will include several 15-minute animated programs, including “Axe Cop,” “High School USA” and an as-yet-untitled project from sibling comedy duo Kenny and Keith Lucas, aka The Lucas Brothers.
During a panel on the new animation block on Tuesday, Animation Domination High-Def head Nick Weidenfeld, formerly the head of development for the Cartoon Network’s Adult Swim, said that the block will provide a forum for “experimental and more interesting forms of animation.” He also noted that it’s possible that some of the projects could end up transitioning to the network’s primetime Animation Domination block.
However, he added, “the stuff that we’re making is not the exact same fare as a Sunday night broad comedy show… those shows need to be huge hits.”
Featuring a cast that includes Oswalt, “Breaking Bad” alum Giancarlo Esposito and Jonathan Banks, and “Community” creator Dan Harmon, “Axe Cop” is the brainchild of five-year-old Malachai Nicolle and his 30-year-old brother, Ethan Nicolle. The series will follow a superhero who lives on a steady diet of birthday cake and dispenses his own unique brand of vigilante justice. Weidenfeld and “American Dad” vet Judah Miller developed the series, with Matt Silverstein and Dave Jeser of “Drawn Together” serving as executive producers and show runners.
Meanwhile, “High School USA” revolves around a group of super-positive millennial students as they tackle modern perils such as cyber-bullying, Adderall addiction and embarrassing sexting incidents. “Community” and “TV Funhouse” veteran Dino Stamatopoulos created and is writing the show, which boasts a cast including Vincent Kartheiser of “Mad Men” and “Mandy Moore.”
The untitled Lucas Brothers project, which is based on the siblings’ stand-up comedy routine, follows the pair as they attempt to run a moving company, dubbed Va¢ation Boy$, after inheriting an old van from their uncle.
After a surprising engagement last week, Disney’s under financial trouble after discovering last week that the company’s staff might get laid off due to the recent life threating economic events dating back to last year. Meanwhile, Warner Bros. is teaming up with the animators of the past movies by forming a new animated company. Are both movie companies possibly avoid a big fight with Fox and Disney Angie?
Angie Angelfish (via The Wrap)- Walt Disney Co started an internal cost-cutting review several weeks ago that may include layoffs at its studio and other units, three people with knowledge of the effort told Reuters, in an early sign that big companies may not be finished tightening their belts.
Disney, whose empire spans TV, film, merchandise and theme parks, is exploring cutbacks in jobs it no longer needs because of improvements in technology, one of the people said.
Cuts are most likely at the studio, said two of the three sources, where the strategy has changed to focus on fewer films and rely more on outside producers such as Steven Spielberg’s DreamWorks studio, which finances its own films and pays Disney a fee to market and distribute them.
It is also looking at redundant operations that could be eliminated following a string of major acquisitions over the past few years, said one of the sources.
The people did not want to be identified because Disney has not disclosed the internal review.
After years of repeated and sometimes severe cost cutting in the wake of the financial crisis, by last summer it looked as though Corporate America had trimmed all the fat and was back on the path of profits through operating growth. But news Disney is weighing cuts – on the heels of Eli Lilly and Co’s warning last week that cost controls would drive earnings this year – could herald yet another wave of retrenchment.
Disney executives warned in November that the rising cost of sports rights and moribund home video sales would dampen growth.
“We are constantly looking at eliminating redundancies and creating greater efficiencies, especially with the rapid rise in new technology,” said Disney spokeswoman Zenia Mucha.
In terms of profit margin, Disney’s studio is the least profitable of the entertainment conglomerate’s four major product divisions. The studio had a profit margin of 12.3 percent in 2012.
Its fifth division, the interactive unit that creates online games, lost $758 million over the last three years, according to the company’s financial filings. The unit lost $216 million last year.
Disney could trim jobs at both the studio and interactive divisions as well as its music arm, said Tony Wible, an analyst with Janney Montgomery Scott, who has a neutral rating on the company’s stock.
The media company is in what CEO Bob Iger calls a “transition year” after spending on projects such as the “Cars Land” expansion at the Disneyland Resort in California and a new cruise ship that launched last year.
“We invested a lot of money in our theme parks and resorts business,” Disney Chief Financial Officer Jay Rasulo told a media conference in December. “We want to execute against delivering the returns that we’ve been promising all of you for the years that we’ve been making those investments. We really want to hunker down on it.”
Staff cuts are not a certainty at this point, the source added, although the company has a history of streamlining operations through layoffs.
2011, the interactive group laid off about 200 people at its video games unit after what Disney executives said at the time was a shift away from console games to focus on online and mobile entertainment. In September, 50 employees at Disney Interactive were laid off in a restructuring of the money-losing unit, according to one of the sources.
The company also made cuts at its publishing unit last year, and cut workers at its studio in 2011.
“This is not necessarily a negative thing,” said Michael Morris, an analyst with Davenport and Co who has a buy recommendation on the stock but was not aware of the review.
“It speaks to a fiscally responsible management.”
If Disney does make some cuts, it would be the latest company to warn that costs still need to come under control.
Lilly said last week that sales this year would be flat to slightly higher, but said profit growth would exceed Wall Street estimates on the back of cost controls. In late December, book publisher Scholastic Corp said it too would look for cost savings in the current fiscal year.
Disney and Lilly are far from alone, though. Tech companies in particular are expected to have been hurt by the fourth-quarter uncertainty over the impending “fiscal cliff” of automatic tax increases and spending cuts which led corporate clients to slow or stop spending.
Congress agreed to a deal on January 1 that averted the cliff.
Fear of the cliff may have affected sales across a range of industries, further clouding the growth picture. Retailers are also expected to contend with the fallout of a lackluster holiday season, which could lead to cutbacks.
Thomson Reuters corporate earnings research analyst Greg Harrison said many of the themes that held true in 2012 — like cost cuts that helped earnings, even as sales stalled — were likely to carry over into this year.
“In the absence of any fresh catalysts for profits emerging, it may be reasonable to expect that current estimates for earnings growth in the low- to mid-single digits throughout 2013 may shrink, even though analysts believe that the slowest part of the earnings growth is now behind us,” Harrison wrote in a preview of the fourth-quarter earnings season.
If a trend is emerging, it should begin to be clear as soon as the next two weeks, as companies start reporting 2012 results and offering up their 2013 outlooks.
The present review, headed by CFO Rasulo, has already identified areas to change in the company’s travel policy, said one of the sources. It is also looking at a hiring freeze rather than layoffs, said a second source.
The film strategy shift began when Iger took over as CEO in late 2005. Under Iger, the company purchased “Toy Story” creator Pixar Animation and Marvel, which brought it characters such as “Thor” and “Iron Man” that featured in this summer’s blockbuster hit “The Avengers.”
Disney completed a $4.06 billion acquisition of “Star Wars” creator George Lucas’ Lucas film in December, and has said that it will begin producing new installments of the lucrative franchise in 2015, and make a film every two to three years.
Shares in the company fell 2.3 percent on Monday to close at $50.97, sharply underperforming broader markets.
Warner Bros. doesn’t want rivals like Walt Disney Studios and 20th Century Fox to have a stranglehold on the lucrative animation market.
But the studio is trying a different approach in an effort to bolster its animated efforts. Instead of unveiling a new division, it’s announcing an animation creative consortium, featuring the likes of John Requa and Glenn Ficarra (“Crazy, Stupid, Love.,” “Cats & Dogs”) and
Nicholas Stoller (“The Muppets”) that will help it develop its family offerings. Also on the team will be Phil Lord and Chris Miller (“Cloudy With a Chance of Meatballs”) and Jared Stern (“Mr. Popper’s Penguins”). The approach is to bet on filmmakers who have a track record in family entertainment.
The consortium will not have any overhead costs associated with it, an individual with knowledge of its workings told TheWrap, but it has been given a mandate to develop and produce family-oriented works with broad appeal. The studio wants to release at least one animated film a year under the Warner Bros. Pictures banner.
“Warner Bros. has an extraordinary legacy in the world of animation, including some of the most enduring characters in cinema history,” Jeff Robinov, president of Warner Bros. Pictures Group, said in a statement. “Looking to the future, we have now gathered some of the best and brightest talents in the industry to help us grow and broaden that legacy.”
In addition, Warner Bros. gave an indication of what its animated future might look like, announcing that the first feature in the pipeline is “The LEGO Movie.” Lord and Miller wrote the screenplay inspired by the popular children’s toy and will direct. The film will feature the voices of Will Ferrell, Elizabeth Banks, Liam Neeson, Will Arnett and Morgan Freeman and is slated for release on February 7, 2014.
Warner Bros. said that other projects include “Storks” directed by Doug Sweetland, who helmed the Pixar short “Presto”; and “Smallfoot,” which will be written by Requa and Ficarra, from an original idea by “Despicable Me”s’ Sergio Pablos. Pablos will direct “Smallfoot.” Warner Bros. said that “Storks” and “Smallfoot” are being targeted for release in 2015 and 2016, respectively.
It’s not that Warner Bros. has been devoid of animated hits. “Happy Feet” grossed nearly $385 million globally for the studio in 2006. However, other films like 2010’s “Legend of the Guardians: The Owls of Ga’Hoole” ($180 million worldwide) and “Happy Feet Two” ($150 million worldwide) did not earn enough to justify their sizable production budgets.
Moreover, Walt Disney has continued to hold sway over children’s entertainment thanks to its acquisition of Pixar and Fox’s Blue Sky Studios has become real player with its “Ice Age” films. Moreover, the recent distribution pact between Fox and DreamWorks Animation threatens to turn that studio into an animation powerhouse. At the same time, Paramount has announced that it has its eye on the toon game and has launched its own in-house animation division.
The competition in the genre is pitched, but the allure is undeniable. Animated films tend to travel across cultural boundaries and are easily dubbed into other languages, making them essential to studios who recognize that any substantial growth in their overall box office take must come from aboard.
The development of animated features will be overseen at Warner Bros. by production executives Courtenay Valenti, Chris deFaria and Greg Silverman. Overall look, character design and the story reel process will be housed in Warner Bros.’ Burbank offices, but the studio said it will look to partner with established animation studios for production of the films.
295 fans sign in as we get close to 3000 in the Penguins tally. Look for the last 2 new episodes to come this spring, time permitting.
Awards season is underway this Sunday as we look to the 2013 Golden Globes. We’ll reveal the winners next time as your favorite movies are one step closer from being Oscar worthy! See you soon TV and movie fans!
gtnjr17
Gary Jr.'s World 