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 Skg Inc (NASDAQ:DWA). 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 (we hesitate 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 Skg Inc is also forming a joint venture to better tap the Chinese entertainment market.
The market is strongly divided on Dreamworks Animation Skg Inc, 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 we’d expect 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. We don’t like the inherent risk in film studios and we’d certainly by wary of counting on high earnings growth at DreamWorks.
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