Wall Street appears to be largely unimpressed with DreamWorks Animation CEO Jeffrey Katzenberg’s vow last night to boost profitability by making fewer films with fewer people. Its share price is down 14.7% in pre-market trading, as analysts debate whether DWA will have enough cash to keep going if another film requires a write-down similar to ones for Turbo, Rise Of The Guardians, Mr. Peabody & Sherman, and Penguins Of Madagascar.
Here are some of the early notices, including analysts’ recommendations for investors, which we’ll update as additional ones come in:
— Cowen & Co, Doug Creutz: Downgrade to Underperform. DWA is in “a precarious financial position” with $500 million in debt, $50 million in cash, $110 million in cash costs for restructuring, and just one film — Home — teed up for 2015. Although it has $200 million available in credit, the company may have to pay $100 million next year to those who owned Awesomeness TV before DWA bought it in 2013. What’s more, “layoffs and management turnover are usually disruptive and morale-draining, and often damaging to a company’s culture.” The bottom line: the new firings risk “further worsening DWA’s competitive position in the very competitive animated film market.”
— Janney Capital Markets’ Tony Wible: Downgrade to Sell. The analyst says he sees “higher risk and little growth from Film until 2017.” With its new writedown for The Penguins Of Madagascar, DWA “has now impaired 4 of the last 6 films and canceled two films in production, which undermines confidence in its ability to convert the massive film inventory into cash.” He also warns that “an increase in leverage and drastic cut to earnings will spark liquidity fears.”
— BTIG’s Richard Greenfield: Sell. The studio is in “a dire situation,” he says. Its upcoming release, Home, “will likely lose money” — and there could be additional losses from the decision to put a planned summer 2016 release, B.O.O., back into development. Greenfield suspects DWA moved Kung Fu Panda 3 from late 2015 to 2016 due to creative problems, but also because of “the liquidity problems more failures in 2015 would have created.” He doubts Fox will renew its distribution agreement past 2017, or that Netflix will extend its licensing deal past 2018. As a result, “it is hard to have confidence in DWA’s liquidity situation beyond 2018. While a new hit franchise can solve DWA’s problems quickly, Dreamworks’ batting average has been exceedingly poor over the past decade since their IPO.”
— Stifel’s Benjamin Mogil: Hold. While he doesn’t fear that DWA will run short of cash, he says earnings will be “volatile given the reduced slate.” Although the studio says that by 2017 production costs will drop to about $120 million per film from $145 million, DWA “had already guided investors to production cost targets in that area for 2016 releases so from an estimate perspective there are no changes.”
— Sterne Agee’s Vasily Karasyov: Underperform. Katzenberg didn’t address “the central challenge of the current business model”: How can upcoming films become profitable if they face growing competition and diminishing opportunities to generate revenue? If Home follows the trend of Penguins, Peabody & Sherman and other recent films it “will be a write-off, too.” With DWA’s diminished output and restructuring payments, “we expect the Street to increase focus on liquidity. The company hasn’t been free cash flow positive since FY10.”
— B. Riley’s Eric Wold: Neutral. Investors should stay on the sidelines, he says, because “it will be at least 12-18 months before any results [from the new changes] begin to materialize – and the pressure to create successful titles will only increase.” He’s not afraid of a liquidity crisis as he looks as DWA’s “credit facility availability and recent proceeds from the AwesomenessTV stake sale.” But those hoping that the company will be sold should now figure that any merger efforts will “be on hold given the diminished value of the library and need to gain confidence in upcoming slate potential.”