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'Shrek 2' - can the ogre sell the stock?
Movie is expected to be a monster hit, but some question if it's enough to buy into DreamWorks IPO.
May 19, 2004: 10:36 AM EDT
By Chris Isidore, CNN/Money senior writer

NEW YORK (CNN/Money) - Some see "Shrek 2" as this summer's "Finding Nemo."

"Shrek 2," which opens Wednesday, is forecast to have U.S. box office of close to $300 million.

But even if DreamWorks SKG's sequel to its 2001 hit turns out to be as big a box office and profit hit as anticipated, investors should be wary of the studio's plans for an initial public offering.

That's because the company's track record has been uneven at best, and it faces increased competition and the typical difficulties seen by stocks of stand-alone movie studios.

DreamWorks' successful animation studio, which is widely expected to be spun off by itself through the IPO, has not had the 1.000-batting average of competitor Pixar Animation Studios (PIXR: Research, Estimates). And Pixar, whose "Finding Nemo" was its fifth movie in five tries to top the $160 million mark for U.S. box office, saw its stock lag in its first few years as a public company, even as turned out hit after hit.

By comparison, DreamWorks' animation has only topped the $100 million mark in U.S. box office with two films -- the original "Shrek" and "Prince of Egypt," the 1998 film that tells the story of Moses.

Still even disappointing animated movies from DreamWorks, such as last year's "Sinbad: Legend of the Seven Seas," have recouped their estimated production costs through worldwide box ticket and DVD sales. And Shrek's popularity gives the studio a franchise it is likely to milk for at least one more movie, if not more.

"Shrek 2" opened Wednesday to widely positive reviews and some projections that it could break the record that "Finding Nemo" set last year for the biggest box office by an animated movie, when it did U.S. box office off $339.7 million and worldwide box office of $864.6 million. (Click here for review: 'Shrek 2' better than original.)

More hits needed

Still, even some who are bullish on "Shrek 2" are bearish on the idea of a DreamWorks animation stock. Independent stock analyst Dennis McAlpine said DreamWorks' uneven record compared to Pixar should give pause to potential investors.

"Pixar's movies have been better than average and better than what DreamWorks has seen," said McAlpine. "The reviews are good on 'Shrek 2.' It's not I don't have faith in DreamWorks. I just don't know how you make it an attractive investment."

Stand-alone studios, such as Pixar or Metro-Goldwyn-Mayer (MGM: Research, Estimates), can have uneven stock performance based on the success or failure of a single film, McAlpine said. That's why most of the publicly-held studios are parts of much larger media conglomerates.

Company officials have not commented on their IPO plans, although analysts say DreamWorks' "book" of financial results in preparation for the offer is circulating on Wall Street.

McAlpine says one thing working for DreamWorks is it has a larger product pipeline than Pixar, which is only now reaching its one-movie-a-year target. By comparison DreamWorks animation has had a movie a year since its 1998 debut and this year will have two films -- "A Shark's Tale" is set for an Oct. 1 release. DreamWorks also has a computer-generated animated television series, "Father of the Pride," set to debut on NBC this fall.

"Having only one movie a year, unless it's 'Nemo,' is kind of tough," said McAlpine.

DreamWorks' has a second animated movie, 'A Shark's Tale' due out in October.  
DreamWorks' has a second animated movie, 'A Shark's Tale' due out in October.

But Paul Kim, media analyst with Tradition Asiel Partners, said the computer-generated animation sector is getting crowded.

Disney, which has seen its traditional animation efforts flop badly in recent years, is moving into CG with its first such offering "Chicken Little," due out in summer of 2005. Fox, had a CG hit with the 2002 film "Ice Age," its first effort in this area, and Viacom's Paramount studio made $102 million worldwide with the lower cost "Jimmy Neutron: Boy Genius," in 2001, which it subsequently turned into a series for its Nickelodeon network. A movie sequel is due out this summer.

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"In the next year to five it'll be a much more competitive field," said Kim. "There's a lot of money to be made but a lot of pitfalls as well."

DreamWorks co-founder Jeffrey Katzenberg, the head of its animation efforts, recently told the Wall Street Journal the company has no capital or liquidity needs and could continue as a private company for the foreseeable future. But Kim and others think the desire to have that liquidity, and the expected success of "Shrek 2" make an IPO likely later this year.

Box Office

"They're using 'Shrek 2' as an ideal launch vehicle," said Kim. "But If Pixar is valued at $3 billion to $4 billion and DreamWorks wants to be valued at close to that. As an investor I'd be highly skeptical."

Still, the company does have its fans. David Mumpower, president of box office analysis firm Box Office Prophets, said he expects "Shrek 2" to pull in about $300 million in U.S. box office and that it could break Nemo's record of $339.7 million.

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"The problem has been on the live action side, not animation," said Mumpower. "If you take the team that has being working on Shrek and keep giving them experience, that's the safer play."  Top of page

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