DreamWorks Animation isn’t completely out of Wall Street’s dog house yet. The studio’s shares retreated 5.2% to $26.40 today after CLSA analyst Vasily Karasyov initiated coverage with a “sell” recommendation and a target price of just $17.
That challenges the prevailing view that CEO Jeffrey Katzenberg’s painful restructuring in late January following a string of underperforming movies finally has DWA back on track. He vowed to cut movie production costs, and diversify revenues by boosting television, online video, and consumer products. The company’s share price is up about 42% since then and touched a 52 week high of $29.75 last week after Stifel Research’s Benjamin Mogil upgraded his recommendation to “buy” with a price target of $34.
Karasyov agrees that the company is likely to see “a drastic uplift in Film profitability and TV revenue growth and [profit] margin.”
The problem is that many investors don’t appreciate the rising costs as the company hires people to work on the growing businesses. They also are too optimistic about how well upcoming movies and productions will perform, and how much money DWA will see from TV and consumer products.
“A comparison of historical consensus estimates and actual results shows that the consensus repeatedly proved to be too optimistic about DWA’s future performance and by a wide margin,” Karasyov says. Indeed, analysts’ average forecasts for DWA’s cash flow “were wrong every year since the company’s IPO and the median variance is $84 million.”
He expects DWA to see a $100 million profit from Kung Fu Panda 3 (to be released in January 2016), $25 million from Trolls (November 2016), $25 million from Boss Baby (January 2017), and $104 million from The Croods 2 (December 2017). If he’s right, then the next four films would make more than the previous 10, which collectively netted $206 million.
The latest DWA release, Home, generated $363 million in box office sales worldwide — but with its high production and distribution costs probably just added $16 million to the studio’s cash flow. If its distribution costs matched previous releases, then it “would be yet another write-down.”