Caris & Co. said it is impressed with the investor screening of Kung Fu Panda 2 on Saturday afternoon at DreamWorks Animation (NASDAQ: DWA) headquarters in Glendale, California.
We attended an investor screening of Kung Fu Panda 2 Saturday afternoon at DreamWorks headquarters in Glendale, California and can say, without hesitation, that the film is just as commercially viable, if not more so, than its 2008 predecessor, which was an international hit in the early summer of 2008, said David Miller, an analyst at Caris.
Miller also reminds investors that, unlike Shrek 4, this film will debut in most Asian territories, including the Philippines, Korea, Malaysia and China, on the same day as the U.S., that being this Friday, May 26.
Miller said the film had all the requisite ingredients required for a fun, family CGI (computer-generated imagery) animated hit (great writing, definable characters, beautiful animation, adult jokes that fly over kids’ heads, etc.) in a summer tent-pole season which, while certainly crowded with franchise popcorn fare, will see only two animated films, those being Kung Fu Panda 2 and Walt Disney's Cars 2, the latter of which will not see its domestic debut until June 24.
While fear of competition from Cars 2 within select international territories is now yet another reason for DreamWorks' doggish performance against the market, Miller reminds investors that Kung Fu Panda 2 and Cars 2 will, for the most part, be released in a 4-6 week spread away from each other. The only exception to that is the release of Cars 2 in Singapore, Thailand, Taiwan and Malaysia, all of which will occur in August.
The screening also left Miller very comfortable with his Kung Fu Panda 2 domestic box office and International box office projections going into the release next weekend, which are $250 million and $450 million respectively. To review, the first film in this franchise cleared $631.7 million in 2008 U.S. dollar, all without any 3-D up-charges.
Assuming a 3-D participation rate of 60 percent, which has emerged as a de-facto standard for CGI animation over the past two summer tent-pole seasons, and assuming an industry average $4 up-charge, then the $215.4 million cumulative Miller saw with Kung Fu Panda 1 turns into $289.3 million for Kung Fu Panda 2, and the $631.7 million global cumulative he saw with Kung Fu Panda 1 turns into $752.2 million with Kung Fu Panda 2.
With that, Miller continues to model a $750 million global theatrical ultimate for Kung Fu Panda 2, and should the film reach that level, he can state with 100 percent confidence that fiscal 2011 Street consensus EPS of $1.78 is too low.
Despite frustration with this name that is approaching boiling point status, we are maintaining our buy rating, as DreamWorks in our opinion should be afforded a scarcity-premium by the market, given that, other than Lionsgate (LGF), which has a myriad of balance sheet issues, there are no other SMID pure content names left to own, said Miller.
So, with: a healthy film pipeline that still features sequels/derivatives to all four major franchises, the oft-ignored possibility of a revamped distribution arrangement with Paramount, and a still-active buy-back authorization, Miller still believes that there is more reward in this story than risk at current levels.
DreamWorks closed Monday's regular trading down 0.64 percent at $24.75 on the NASDAQ Stock Market.