DreamWorks’ Nightmare Shows No Sign of Ending
Another poor opening weekend for DreamWorks Animation points to more sleepless nights for investors.
With results from the long holiday weekend pointing to more bad times for DreamsWorks Animation (ticker: DWA ), investors could be forgiven for wishing that the stock’s chronic underperformance has been a bad dream.
The latest release from Jeffrey Katzenberg’s family entertainment studio, “Penguins of Madagascar,” got a chilly reception on its opening weekend in U.S. movie theaters, grossing an estimated $36 million to place a distance second behind the latest “Hunger Games” film.
Shares tumbled 5% to $22.64 in afternoon trading and could fall further given the company’s uncertain outlook and the stock’s unappealing valuation.
This morning, FBR Capital Markets analyst Barton Crocket and his team downgraded DreamWorks to Underperform.
“The [box office] miss highlights issues that we see weighing on DWA stock: rising competition—especially from Disney—and DreamWorks’ difficulty in sustaining momentum in its post-Shrek franchises,” writes FBR’s Crockett in a note published today. “A more skeptical stance on these issues accompanies an estimate reduction from the Penguins miss, prompting our downgrade to Underperform, with a $14 price target.”
While rival Walt Disney ( DIS ) has climbed more than 20% this year, DreamWorks has fallen more than 36% as financial forecasts for the year have grown increasingly dismal. But disappointment is nothing new. DreamWorks stock, which offers no dividend, has lost roughly 40% of its value in the past decade.
In March, Barron’s weighed in on the stock, arguing that DreamWorks’s lack of box office hits warranted caution towards the stock (see Ahead of the Crowd, “DreamWorks Frozen Out of Box Office Hits,” March 18).
Talk of an acquisition has acted more as a distraction, too. Twice this year, DreamWorks has reportedly been in merger talks -- the first time with SoftBank ( SFTBY ) and more recently with Hasbro ( HAS ) – that eventually faded.
Bulls regard DreamWorks as a turnaround story. The studio has labored in recent years to diversify beyond the hit-or-miss feature film business.
Still, theatrical releases continue to drive much of DreamWorks’s revenue. The chilly reception at the box office for “Penguins of Madagascar,” which received mixed reviews from critics, is fueling worries that DreamWorks will resort to another write-down this quarter.
Analysts expect DreamWorks to lose 19 cents a share this year with revenue rising just 3.1% to $729.12 million.
Licensing, responsible for $29 million in gross profit last year, may not help much either as those earnings also depend on a movie’s success. And with DreamWorks’ other big movie franchise, “How to Train Your Dragon,” looking a bit fatigued and stiff competition expected next year, FBR’s Crockett finds little to support bullish arguments anchored by estimates that have licensing driving $200 million of annualized EBITDA.
However, DreamWorks has several films slated through 2016, including “Kung Fu Panda 3” next year. Last week, Morgan Stanley upgraded DreamWorks stock to Overweight, arguing that efforts to monetize its film characters should play out in 2015.
Analysts expect earnings of 85 cents a share in 2015 and revenue to climb 33% to $975.1 million. However, at 26.6 times expected 2015 earnings, the stock looks pricey, especially given the company’s uncertain outlook.
Why be a hero and buy DreamWorks stock? Buy a movie ticket and watch a hero instead.
