Tuesday, December 19, 2006

Calls of Note Part 2

- Banc of America is increasing their target on Dreamworks (NYSE:DWA) to $37 from $31. 2006 has been a transformative year for DWA as it dissolved HoldCo, forged its relationship with Paramount, and its partnership with Aardman likely is over. Firm thinks the following are not yet reflected in DWA shares:

1) DWA's valuation has potential for upside. Firm forecasts normalized EPS of $1.80 - $2.00. The new target reflects the rolling fwd of estimates and higher movie assumptions in 2008+. It implies DWA could trade at 19.5x earnings, in line with other media co's and still a steep discount to the 50x price that DIS paid for PIXR.

2) BAC still believes a share buyback is likely. Despite a strong rally in DWA shares, they believe a repurchase in the low $30-range is attractive relative to where the stock could be in 12-24 months.

3) The visibility into DWA's film slate is far better today than it was at its IPO in late 2004. Over the next few years, feature films include two Shrek releases, Seinfeld's Bee Movie, a sequel to Madagascar, and Kung Fu Panda starring Jack Black.

4) They believe there is still untapped value in the Shrek franchise. In addition to at least two more Shrek films, we expect a Broadway musical of Shrek and a feature film based on supporting characters.

5) The company has yet to exploit its relationship with Paramount. Firm's model does not reflect the value of potential television projects with Nickelodeon or other potential synergies with Paramount.

Notablecalls: One for the investor types. Right now the stock looks like it wants to go lower.

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