Are Investors Too Optimistic About DreamWorks Animation?

Morgan Stanley analyst Benjamin Swinburne thinks so, sticking with his bearish case today following a year when the studio’s stock soared 114% to $35.50. He raised his target price this morning — but just to $31, which is why he still has an “underweight” recommendation for the stock. The market’s current valuation only makes sense, he says, if DreamWorks Animation beats his film box office forecasts by as as much as 15%, or TV revenues come in 70% higher than he envisions or consumer products beat his expectations by 80%. Looked at another way, DWA would have to generate about $400M in cash flow this year, ahead of his projection for about $310M. After deals with Netflix and others designed to make DWA a TV production power “We suspect the market is overestimating the impact of television and [consumer products] growth while underestimating the importance of film performance” which still accounts for more than 70% of gross profits, Swinburne says. He remains skeptical DWA can fulfill the Street’s extravagant expectations even though he’s warmed somewhat to its prospects. He no longer expects CEO Jeffrey Katzenberg to take a $10M writedown on Turbo, and raised his box office forecast for How To Train Your Dragon 2 by $20M “primarily on a strong international outlook.” Still, he’s concerned that in November Lionsgate’s The Hunger Games: Mockingjay Part 1 comes out just a few days before DWA’s Home. That “leads us to believe that the overall 2014 competitive slate is more neutral than might be suggested” by the relatively clear playing fields in March for Mr Peabody And Sherman and in June for Dragon 2

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