Cramer’s Bullish on Cartoons

Disney’s Alice in Wonderland hits theaters this weekend, with many locations across the US already sold out. Alice, along with Avatar, is the latest in a line of must-see 3-D flicks that’s driving the industry as a whole, but DIS is not the way to play the trend, Cramer said Friday. Investors should go with DreamWorks Animation instead.

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Cramer first got the idea for DWA from Danny Meyer, a restaurateur and author of Setting the Table, who has proved himself an expert at judging consumer behavior. Meyer says that companies that prioritize customer service engender a loyalty that helps them survive even the worst of downturns. And the success of the hospitality index he created for Mad Money shows just how right he is: It’s up 101 percent since its Feb. 2, 2009, inception versus just 37 percent for the S&P 500.

Why does Meyer like DWA? Because its movies make people feel good. Yeah, it’s not the type of analytical rigor that Mad Money viewers are used to. But Cramer did the research and Meyer’s hunch panned out.

Now “I can confidently tell you that I think DreamWorks Animation is a buy,” the Mad Money host said.

As Cramer explained in his segment on Cinemark, which is up about 19 percent since his Feb. 5 recommendation, the 3-D biz is starting to boom again. And all of DWA’s movies are 3-D. That gives the company a head-start in the generated revenues department, as these tickets go for $3.25 more than regular films. Cramer specifically likes DWA here because 3-D moves the needle for this company in ways that it just doesn’t for Disney.

DreamWorks just reported a strong quarter on Feb. 22, and Cramer described management’s 2010 outlook as “extremely bullish.” This year alone the studio is releasing How to Train Your Dragon, Shrek Forever After and Megamind, followed by two more animated features planned for 2011 and three for 2012. Cramer noted that these films will arrive at a time when tight financing is reducing major studios’ output, which means less competition for DWA and longer runs for its movies.

The other positives for animation in general are its low costs, especially when it comes to paying actors, and high barriers to entry. DreamWorks and Disney’s Pixar operate at such a high level that few others can compete. There’s also merchandising, which DWA’s management said could generate as much as $65 million for How to Train Your Dragon, which will be released later in March. And finally, there’s a huge international opportunity here, as overseas releases often generate 1.5 to 3.5 times their domestic gross.

DWA is cheap, too, trading at just 15.5 times earnings with a 17 percent growth rate. But investors shouldn’t feel the need to rush in, considering the stock is just $2 off its 52-week high.

“We like DreamWorks Animation as an investment,” Cramer said, “not just a trade on one movie.”

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