Can DreamWorks Animation See a Turnaround?

With shares of Dreamworks Animation (NASDAQ:DWA) trading around $24, is DWA an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Dreamworks is engaged in the development and production of animated films and their associated characters in the worldwide film, home entertainment, television, merchandising and licensing markets. The company aims to create family entertainment, including animated feature films, television specials and series, live entertainment properties and related consumer products, meant for audiences of all ages. The company’s films are distributed through many outlets by Paramount Pictures Corporation, a subsidiary of Viacom (NYSE:VIA).

DreamWorks, the Steven Spielberg-founded animation studio responsible for Shrek and How to Train Your Dragon, has a new YouTube (NASDAQ:GOOG)(NASDAQ:GOOGL) channel, and the studio hopes it will be a retro-sighted game changer. DreamWorks could really use some good fortune right now. A couple of years ago, YouTube doled out $100 million to around 100 different artistic creators with the goal of producing original content for the streaming service. DreamWorks TV, the new YouTube channel, is one result of the experiment. It’s akin to the now-defunct Awesomeness TV, a channel that offered programs not unlike what you might have found on the Disney Channel circa 1998. Helmed by TV producing veteran Brian Robbins, DreamWorks TV is meant to function like the innovative fledgling MTV in the ’80s, which pioneered the music video revolution before killing it some 20 years later with myriad reality TV shows. Robbins said the company aspires to conflate the chaotic, ADHD-addled immediacy of online entertainment with the polished gleam of major motion pictures. Aimed at the 6- to 11-year-old crowd, the channel will feature well-known characters such as Shrek and Kung Fu Panda with lesser-known newbies Jimmy Blue Shorts and Fifi Cat Therapist. One of the early videos depicts Puss in Boots, of the Shrek series, telling kids how they can stand up to bullies. “This is really about building the cable channel of tomorrow,” Robbins said in an interview with the Los Angeles Times. “What we think is happening digitally is that the next generation of those brands will be born out of this digital revolution that’s going on.”

DreamWorks is in a bit of a rut right now, with its much-hyped and warmly received How to Train Your Dragon 2 taking in only $50 million its opening weekend, around $15 million less than expected. DreamWorks stock has tumbled 11 percent to $24.35, and to date its shares are off nearly 32 percent, according to USA Today. The studio is still hurting from 2012′s Rise of the Guardians and 2013′s snail-starring action film Turbo, from which it has yet to recover production, marketing, and distribution costs. The studio incurred an $86.9 million write-down for Guardians in the fourth-quarter of 2012 and a $13.5 million, 2013 fourth-quarter write-down for the snail movie. DreamWorks bought Classic Media in 2012, which gave the studop more than a hundred characters, including Richie Ritch, who will be reborn for the new YouTube channel. “You could go out and buy a cable channel for $1 billion and spend $1 billion to program it, or you can go where the eyeballs are going fast and furious, which is mobile and online,” Robbins told the Los Angeles Times. “Kids are consuming their content on tablets and phones in an enormous way, and we felt, if we’re going to make original [intellectual property], why not make it for that audience?”

T = Technicals on the Stock Chart Are Weak

Dreamworks Animation stock has struggled to make significant progress in recent times. The stock is currently trading sideways and may need time to consolidate before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Dreamworks Animation is trading below its rising key averages which signal neutral to bearish price action in the near-term.

DWA

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Dreamworks Animation options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Dreamworks Animation options

38.39%

66%

64%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Steep

Average

August Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Dreamworks Animation’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Dreamworks Animation look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-828.57%

-120.44%

-58.62%

73.33%

Revenue Growth (Y-O-Y)

9.35%

-22.81%

-17.04%

5,168.82%

Earnings Reaction

-8.87%

-12.18%

17.36%

8.84%

Dreamworks Animation has seen decreasing earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Dreamworks Animation’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Dreamworks Animation stock done relative to its peers, Twenty-First Century Fox (NYSE:FOXA), Disney (NYSE:DIS), Lions Gate Entertainment (NYSE:LGF), and sector?

Dreamworks Animation

Twenty-First Century Fox

Disney

Lions Gate Entertainment

Sector

Year-to-Date Return

-30.30%

1.56%

8.70%

-15.70%

-7.93%

Dreamworks Animation has been a poor relative performer, year-to-date.

Conclusion

Dreamworks is a provider of highly demanded entertainment products to eager audiences around the world. The company has a new YouTube channel. The stock has struggled to make significant progress in recent times and is now trading sideways. Over the last four quarters, earnings have decreased for the company while revenue figures have been mixed which has produced mixed feelings among investors. Relative to its peers and sector, Dreamworks has been a weak year-to-date performer. WAIT AND SEE what Dreamworks does this quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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