A filing with the SEC has disclosed that Horizon Kinetics, an asset manager run by Murray Stahl and his team, now own 9.1 million shares of DreamWorks Animation . At the end of September, the fund had owned 4.2 million shares of the stock and so it has more than doubled the size of its position over the last four months. Read more about Horizon Kinetics and see the fund's stock picks from the third quarter of 2012. Horizon Kinetics’ purchases have brought it up to nearly 12% ownership of the company. Chuck Royce’s Royce & Associates was another investor in the stock at the end of the third quarter of 2012.
DreamWorks is primarily an animated feature film studio whose properties include Shrek and Madagascar. Its revenues in the first nine months of 2012 (it may not be wise to use quarterly numbers for film studios, since it is more likely for the financials to be skewed by successful releases) were about flat versus a year earlier. Higher costs, including SGA expenses, led to a 26% decline in net income. The overwhelming majority of DreamWorks’ business came from film and TV specials. The company has announced that it plans to increase its film releases to three per year; in 2013, it will release The Croods (an animated film set in prehistorical times which is currently being advertised on television), Turbo, and Mr. Peabody & Sherman. DreamWorks Animation is also forming a joint venture to better tap the Chinese entertainment market.
The market is strongly divided on DreamWorks Animation, with the current market price implying quite a bit of optimism about the company. The trailing and 2013 earnings multiples are in the 20-22 range, which is higher than would be expected for a pure value investment and so the company would have to significantly grow its earnings in order to justify the current valuation. A number of traders consider it overvalued at that price, as 40% of the outstanding shares are held short. I don’t like the inherent risk in film studios and I’d certainly by wary of counting on high earnings growth at DreamWorks.
The two closest peers for DreamWorks are motion picture company Lions Gate and Disney which has many other business units including television but does of course operate an animated film studio. Forward earnings multiples at these companies are in the 13-14 range, though in the case of Lions Gate that is assuming considerable improvement on the bottom line (of course, at a film studio it is more likely to see extreme changes in earnings). Disney’s fiscal year ended in September, and in the fourth quarter of that fiscal year the company delivered a double-digit percentage increase in earnings primarily due to higher margins. I’d note that Lions Gate is also a somewhat popular short target, with the most recent data showing that 15% of the shares are held by short sellers, but either of these companies looks like a more reliable value investment than DreamWorks.
Two additional media companies who include motion picture production among their activities are News Corp and Comcast , which is now the owner of NBC Universal. News Corp’s forward earnings multiple is 14, but again that is dependent on better earnings in the next several quarters. In this case, the investment thesis depends on a successful breakup of the company and for management of the new businesses to focus on their own operations. Comcast trades at 18 times trailing earnings, but even this is a discount to DreamWorks and the company reported 15% revenue growth- and very high earnings growth- in its most recent quarterly report compared to the same period in 2011. Comcast should also be noted for having a very stable core cable business.
This looks like a speculative move by Horizon Kinetics, as DreamWorks’ value- particularly given its premium to much larger and more stable entertainment companies- is dependent on some combination of growth initiatives and landing more popular entertainment franchises with its film business. Shorting is probably unwise given a likely high cost to borrow, but I do not think that investors should be long either.
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