That’s what analysts are debating today after last night’s lower-than-expected Q2 earnings report — and disclosure of an SEC investigation — drove shares -14.9% this morning as they hit 52-week lows. Skeptics say DreamWorks Animation is still too uncertain, especially with the additional news of the government probe into the $13.5M writedown in February for Turbo. “This clearly raises uncertainty in a stock that we think already carries higher risk (both strategic and operational),” Morgan Stanley’s Ryan Fiftal says.
The performance of How To Train Your Dragon 2 — which has generated $166M in domestic box office sales since July 28 — reinforced the bear case, even though DWA says the film will be profitable. Dragon 2 “should have done better than it did given its high quality, sequel status, and extraordinarily clear sailing in its release window,” Cowen and Co’s Doug Creutz says. Sterne Agee’s Vasily Karasyov adds that the softer-than-expected performance makes it “harder to argue that future sequels will offset soft results from original releases.” Making matters worse, he says, is DWA’s disclosure that its next two films — The Penguins Of Madagascar and Home — will each cost about $10M more than originally planned: $135M not including what DWA calls “incentive-based compensation.” That raises the possibility of a writedown, Karasyov says.
CEO Jeffrey Katzenberg said that DWA might reduce its per-film outlays by producing some “on a very different scale altogether, where it’s not incremental changes in the film cost, but the concepts of the movies and the style with which we would make them would have us working on a very different business model.” Creutz fears that “may wind up being a losing proposition if cheaper also means less differentiated.” Meanwhile, he notes, DWA’s balance sheet has weakened: It had $400M in debt and $32M in cash at the end of Q2 vs the end of 2011 when it had no debt and $116M in cash.
Others were more impressed. “We come away, positively, with the view that the company can likely release at least one movie a year in the $100M or lower range,” Stifel’s Benjamin Mogil says. B. Riley and Co’s Eric Wold is still “optimistic the company is on-track for stronger profitability trends in 2015+ with lower production costs, a more balanced release schedule, and diversified revenue streams.”
He and others are especially upbeat about the prospects for Penguins, out this Thanksgiving. “Initial reception of the Penguins footage at Comic Con was strong, and on IMDB, Penguins ranks near the DWA average for films 5 weeks prior to their release, with 17 weeks to go,” says Janney Capital Markets’ Tony Wible. As a result, the weak performance of DWA shares “presents investors with an attractive entry point and trading opportunity, as the stock will benefit from positive momentum into the release of a strong Penguins and as focus shifts to a large 2015 inflection in revenues and profitability.”
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