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DreamWorks looks to Shrek to save the day

Dreamworks Animation
/ Source: San Francisco Business Times

DreamWorks Animation is counting on its famous green ogre to pull investors out of the red.

People who bought shares of the company following its ballyhooed initial public offering 18 months ago are still waiting for the stock to surpass the price it hit after its IPO.

With Shrek 3 coming out on May 18, their dreams may finally come true. Though the timing of the release has some worried, so far the buzz has been good.

"The formula that made the first two Shreks so successful appears to still be intact," wrote Banc of America Securities analyst Michael Savner after previewing film clips in early March, noting the movie's "irreverent humor" and the addition of voices from "Saturday Night Live" stars and Justin Timberlake.

The Shrek franchise has been far and away DreamWorks Animation's biggest success. "Shrek 2" is the third-highest grossing film in history with $441 million in U.S. sales. The original Shrek has sold $276 million at the domestic box office. Savner anticipates Shrek 3 will bring in $300 million.

Officially titled "Shrek the Third," the movie will hit theaters shortly after "Spider-Man 3" and just before "Pirates of the Caribbean 3."

"We're an Oreo cookie between those guys, but we're great family fare. The others tend toward an older audience," said Shrek co-producer Denise Cascino, who works in Redwood City, where DreamWorks has 350 digital artists. The Glendale company employs 1,300, but its Redwood City crew did nearly all of the production work on Shrek 3.

Savner, who rates the stock a "buy," agreed that "'Shrek the Third' looks to be in very good shape, crowded release environment or not." He noted that the movie will get a major marketing push through partners that include Nickelodeon and McDonald's. "The new McDonald's partnership alone ... likely totals all previous media buying for Shrek 2."

DreamWorks Animation's early stock performance was sprinkled with stardust by its owners, movie legend Steven Spielberg, music mogul David Geffen and animation honcho Jeffrey Katzenberg and set for take-off after the success of "Shrek 2," which debuted in May 2004.

The IPO priced at $28 a share in October 2004, with shares rocketing 38 percent to $38.56 on their first day of trading and remaining above $35 for more than six months. Today, the stock is trading around $30 a share after steep drops in the second half of 2005 and in 2006, when investors worried the market for DVDs was drying up.

Combined with the disappointing performance of its rat-centered film, "Flushed Away," the hand-wringing brought DreamWorks shares down near the $20 level in August. Other issues have concerned investors, such as last month's departure of Chief Financial Officer Kristina Leslie and the approaching exit of Chief Accounting Officer William Losch, who will step down in May.

And underlying much of the stock price's wobbly performance is that DreamWorks has always operated in the shadow of Pixar's unbroken string of five box office smashes. And aside from "Toy Story," Emeryville-based Pixar, now part of Disney, has not relied on sequels for its hits.

(Said Pixar director Brad Bird at a recent conference previewing Pixar's "Ratatouille," due out in June, "I feel a little bit out of place here," he said. "So I thought of selling it as 'Ratatouille I' ... the prequel to the sequel.")

But DreamWorks' stock is now on a climb, after the company's stronger-than-expected fourth-quarter performance, buoyed by strong DVD sales of the film "Over the Hedge." Early praise for Shrek 3 has it continuing.

Beyond Shrek, DreamWorks is hoping Jerry Seinfeld's upcoming "Bee Movie," due out in November, will rock the box office and that "Kung Fu Panda," starring Jack Black and due out in June 2008, may replace Shrek as its hit-making franchise.