When a studio releases just two films a year, anything less than a hit from either is apt to unnerve shareholders. Consider the blow that DreamWorks Animation SKG Inc.'s balance sheet and reputation took when its widely anticipated "Wallace and Gromit" sequel flopped late last year.


So a somewhat soft opening earlier this month for Glendale-based DreamWorks' first 2006 release, "Over the Hedge," had observers wondering whether Chief Executive Jeffrey Katzenberg's dream machine was losing its magic.


"When the release slate is built on only two films and one underperforms, it has a ripple effect for several quarters," analyst Marla Backer at Soleil-Research Associates told investors in March. DreamWorks had just reported that fourth-quarter profit plunged 67 percent from a year earlier, in part due to "Wallace," which the studio concedes likely will never show a profit.


In the first-quarter of 2006, with neither new theatrical releases nor momentum from "Wallace" DVD sales to boost revenues, the studio's net income fell again, this time by 73 percent actually better than many on Wall Street expected.


Now in the second quarter, "The Da Vinci Code" overwhelmed "Hedge's" debut, holding the computer-generated cartoon's U.S. gross to $37.2 million, compared to $77 million for the film adaptation of author Dan Brown's blockbuster thriller. It was the most anemic opening for a DreamWorks CGI release since "Antz" in 1998 and well behind "Madagascar," which grossed $47 million on the first three days of last year's Memorial Day weekend.


Even so, "Hedge's" performance was in line with distributor Paramount Picture's expectation that some adults would choose to see "Da Vinci" first and take their families to "Hedge" later.


Backer raised her recommendation on shares from a year-long "hold," to a "buy" a few days after "Hedge's" debut weekend. "We believe momentum for (Hedge) will build going into the Memorial Day weekend," Backer said in a May 24 investor note, adding that the film still is capable of meeting her forecast for a $170 million domestic gross.


Backer has a 12-month share price target of $32 for DreamWorks shares, whose price has fallen 22 percent over the past year. The stock closed at $26.60 on May 25.


Katzenberg, who in partnership with billionaires David Geffen and Paul Allen, owns almost 60 percent of DreamWorks Animation's common stock, likely is hoping the forecasts of analysts like Backer bear out.


On top of the disappointing take for "Wallace," the company faced shareholder lawsuits and an SEC inquiry last year after it reported significantly higher-than-expected returns by retailers of the "Shrek 2" DVD, without giving shareholders prior warning. Regulators ended their probe earlier this month without taking any action.


Yet not all those who follow the company are as optimistic as Backer. Merrill Lynch analyst Jessica Reif Cohen, who has a "neutral" rating on the company, estimates that "Hedge" would need to do 10 percent better over the holiday weekend than it did its opening weekend to stay on track to meet her $195 million box office forecast.


And Banc of America analyst Michael Savner, who has a "buy" on shares, cut his 2006 earnings forecast for the company to 34 cents a share from 47 cents. He also lowered his domestic box-office estimate for "Hedge" to $148 million from $167 million, noting that there a chance that "Hedge's" box office could tail off sooner than the typical computer-generated film.


As Savner noted in a May 21 note to investors, "Madagascar" faced considerably less competition last year and continues to be a strong seller in DVD, taking in $30.7 million in this year's first quarter.


"DreamWorks took a calculated risk'' going up against "Da Vinci", said Savner, who earlier had warned that in succeeding weeks "Hedge" would face competition from News Corp.'s "X-Men: The Last Stand,'' and later from Walt Disney Co.'s Pixar film "Cars."


Though Dreamworks Animation this fall will release a second film, "Flushed Away," about an upper-crust rat named Roddy, management said during their first-quarter call that they expect "Hedge" to be the key revenue driver for the rest of the year.


By recommending a "buy" on Dreamworks Animation shares, Backer and Savner are looking forward to 2007, when the third film in the Shrek series will be the studio's first release.


DreamWorks Animation SKG Inc. (NYSE:DWA)
Business: Animated motion pictures
Headquarters: Glendale
CEO: Jeffrey Katzenberg
Market Cap: $2.7 billion
Dividend Yield: N/A
P/E Ratio: 38.94
Total Liabilities: $317.8 million
Long-Term Debt: N/A


YEAR (Dec. 31) 2005 2004
Revenue (millions) $462.3 $1,078.6
Total Expenses (millions) 362.2 639.4
Operating Income (millions) 100.2 438.7
Net Income (millions) 104.6 333.0
Earnings Per Share $1.01 $4.05

Quarterly Net Income (millions)
$146.1 20.3 192 45.7 (3.6) (0.656) 63.2 12.3
6/04 9/04 12/04 3/05 6/05 9/05 12/05 3/06

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