Shares of Dreamworks Animation SKG Inc. climbed more than 2 percent on Monday as an analyst raised his price target and rating for the movie studio, saying concerns about increased production costs and an uncertain distribution deal are probably overdone.
THE SPARK: PiperJaffray's James Marsh said in a client note that there are few details so far on a new agreement for the distribution of future films, but that the probable outcome will add to earnings and provide more flexibility for the business.
"In the end, we see the company saving $10 million or more in distribution expenses and gaining more flexibility in evolving digital distribution channels," the analyst wrote.
Marsh raised Dreamworks' rating to "Overweight" from "Neutral" and lifted its price target to $23 from $20.
THE ANALYSIS: Marsh says Dreamworks has three films set to be released in 2013, compared with two films, "Madagascar 3" and "Rise of the Guardians," this year. Having one extra movie next year should help to reduce per film production costs, he explained.
Last month the Glendale, Calif., company said that its two films in 2012 would cost about $145 million each to make. This is above the usual $130 million, mainly because of longer production times and infrastructure costs.
"We think 2012 is the high water mark for production costs and expect costs to decline over the next three years," Marsh said. He added that 3D costs are also dropping from an estimated $10 million in incremental costs to now a few million.
THE BIG PICTURE: DreamWorks typically makes two or three big-budget computer-animated features every year, all produced in 3-D. As 3-D becomes more widely used by the industry its costs will likely fall, which will benefit the studios.
STOCK ACTION: Dreamworks' stock gained 47 cents, or 2.6 percent, to $18.77 in morning trading. The shares have traded in a range of $16.34 to $28.36 over the last year.