Can Dreamworks Continue This Bullish Run?

With shares of Dreamworks Animation (NYSE:DWA) trading around $23, 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).

In a recent deal with Netflix (NASDAQ:NFLX), Dreamworks has agreed to add its content to the streaming service as Netflix looks to ramp-up its original programming menu with popular choices from the maker of Shrek, Madagascar, and Kung Fu Panda. With this deal, Dreamworks will continue to gain exposure and surely a growing audience.

T = Technicals on the Stock Chart are Strong

Dreamworks stock is surging higher after establishing lows just last year. The stock is now pulling-back after such an impressive run. 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 is trading slightly above its rising key averages which signal neutral to bullish price action in the near-term.

DWA

(Source: Thinkorswim)

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

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Dreamworks Options

62.35%

80%

78%

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

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish 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 Mixed 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’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Dreamworks look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-36.36%

-441.46%

26.09%

-62.50%

Revenue Growth (Y-O-Y)

-1.06%

20.87%

15.88%

-25.41%

Earnings Reaction

7.31%

-1.80%

6.69%

-6.30%

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

P = Excellent Relative Performance Versus Peers and Sector

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

Dreamworks

Twenty-First Century Fox

Disney

Lions Gate Entertainment

Sector

Year-to-Date Return

43.39%

39.29%

29.36%

96.16%

35.87%

Dreamworks has been a relative performance leader, year-to-date.

Conclusion

Dreamworks is a provider of highly-demanded entertainment products to eager audiences around the world. A recent deal with Netflix may increase exposure for the company. The stock is now digesting gains after a strong surge higher, in recent months. 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 year-to-date performance leader. Look for Dreamworks to OUTPERFORM.

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