DreamWorks (NYSE:DWA): Shrek 4 to disappoint?

DreamWorks (NYSE:DWA) is getting some cautious commentary ahead of the domestic release of ’Shrek
Forever After’ this Friday (5/21):

- Cowen says they are adopting a more cautious view of the film’s likely opening weekend box office. Their checks of tracking data point to an opening weekend box office below the $110-$140MM range they think the film needs to hit in order to meet investor expectations. Though the firm ise not changing their $330MM DBO estimate at this time, holders of DWA shares may want to adopt a more defensive position heading into this weekend. They continue to rate DWA Outperform as they still view DWA’s valuation as attractive on their expectations for long-term annual EPS power of $3.00+.

Indicators Suggest a Soft Open. Cowen believes the Street is currently expecting a $110MM+ opening weekend for ’Shrek’, though they think the recent weakness in DWA shares has been at least partly driven by investor concerns about the film’s prospects. The data they are seeing (tracking data from industry sources and B.O. prediction websites) suggest an opening of $100MM or below. They do note, however, that ’Shrek’ faces virtually no competition in the family market and will be the only major 3-D film in theaters until the release of Pixar’s ’Toy Story 3’ on June 18. Firm also notes that ’How To Train Your Dragon’ opened well below expectations, but has achieved pre-release DBO estimates via strong box office legs.

- Thomas Weisel is downgrading DreamWorks to Market Weight with a $38 price target (prev. $44) saying their channel checks indicate to be lower tracking expectations for Shrek 4. Their new estimate for the film domestically is $315mn down from $375mn, which is where they understand that consensus lies. TWP's global box office estimate is now $756mn compared to the $900mn figure for consensus.

Why It Matters: TWP's tracking channel checks for Shrek 4 indicate a $75-90mn opening weekend estimate, where consensus is likely around $110mn mark. While to be fair kids movies are difficult to track, given these tracking results the $375mn figure is too much of a stretch in their view. While the firm ise not generally partial to downgrading ratings on the performance of just one title, Shrek is no ordinary title for DWA as it is both the anchor to this year's EPS estimates but also critical to the 2011 spin-off of Puss In Boots. Furthermore, as DWA enters distribution renewal discussions, such an outcome is not optimal for DWA's bargaining position.

International Results May Be Challenging
So far TWP is continuing to estimate that international box office will index 1.4x that of the domestic box office. However that as well may prove optimistic. For starters, with the bulk of the international results being Euro driven, the recent Euro weakness will hurt results. Secondly, while the company has well telegraphed that the World Cup will lead to a staggered international release schedule, with Toy Story 3 now having released its international dates, the runway which Shrek 4 has domestically is more limited internationally and that may impact results as well.

Notablecalls: I'm sure everyone remembers the 10% drop in DWA stock back in March when ’How To Train Your Dragon’ box office #'s came in below consensus.

Shrek ain't Dragon. Shrek is the cornerstone of DreamWorks' business. Shrek 3 didn't get great ratings (box office was OK), so less people may turn up to see the 4th. So the issue may be somewhat bigger than it seems at first glance.

I'm not sure how the stock will react to these comments today (given the strong tape) but I suspect people will be looking to sell some shares ahead of the weekend. This should keep the pressure on the stock.

A name you can visit, when/if the market rolls over again.