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DreamWorks' shares: Too cheap, or not cheap enough?

February 26, 2009 |  5:30 am

Trading in shares of DreamWorks Animation SKG today will move from the New York Stock Exchange to the electronic Nasdaq stock market, where the company must be hoping it will find a little more investor love for its battered stock.

After a disappointing earnings report, DreamWorks’ shares tumbled $2.14, or 10.8%, to $17.62 on Wednesday, their last trading session on the Big Board. That closing price was the lowest ever for the Glendale studio since it went public at $28 a share in 2004.

DreamWorks said fourth-quarter profit was down 45% from a year earlier, to $51.6 million, or 58 cents a share. DVD sales of the hit "Kung Fu Panda" totaled $102 million in the three months, far short of what "Shrek the Third" delivered a year earlier.

Monstersaliens But in their conference call with analysts, DreamWorks execs sounded supremely confident (this is Hollywood, after all) that DVD sales of "Panda" and the studio’s other 2008 big hit, "Madagascar: Escape 2 Africa," will deliver for the company this year.

During the call, CEO Jeffrey Katzenberg categorized DVD sales of "Madagascar" as "very strong" since its release three weeks ago.

He also noted that the studio’s next big theatrical release -- the 3-D "Monsters vs. Aliens," coming March 27 -- will launch amid a time of booming box-office ticket sales for the industry, as the horrid economy stokes peoples’ need to escape reality.

Given the company’s expectations for "Panda" and "Madagascar" DVD sales and a big box-office take for "Monsters vs. Aliens," Katzenberg said he was "hoping that [investors] will have the same confidence out of this that we do, and we certainly look at our stock today and think it’s undervalued."

But is it? Even after Wednesday’s plunge in the shares, Wall Street gives DreamWorks a higher valuation than what Walt Disney Co., Viacom Inc. and Time Warner Inc. get: DreamWorks’ price-to-earnings ratio is 12 based on expected 2009 earnings of $1.48 a share. The projected P-E's of its three larger rivals all are below 10.

Still, for a proven hit-maker with little debt and $260 million in cash on its balance sheet, DreamWorks is "extremely attractive at this level," analyst Brian Shipman at brokerage Jefferies & Co. told clients on Wednesday.

Richard Greenfield, an analyst at Pali Capital, put this question to Katzenberg during the conference call: "Is there any point where if you don’t get the return from shareholders, that you would more actively think about strategic alternatives?" He presumably meant going private or selling the company.

Katzenberg’s reply: "That’s too wide open a conversation, Rich, and I’ve got too many people waving at me in the room, ‘Don’t answer that.’ "

-- Tom Petruno

Photo: A scene from the upcoming "Monsters vs. Aliens," DreamWorks' first 3-D movie. Credit: DreamWorks Entertainment