Will DreamWorks Animation’s Stock Continue to Be a Nightmare for Investors?

With shares of DreamWorks Animation (NASDAQ:DWA) trading at around $16.65 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:

C = Catalyst for the Stock’s Movement

The tall oak trees that surround you sag at the tops, their branches and leaves forming a depressed canopy that disallows even the slightest trickle of sunlight. The heavy breathing from behind you belongs to the grim reaper, but in addition to a scythe in one hand, he holds a bag of freshly removed hearts in his other hand. His eyes are larger than what you have seen on TV and in movies. His eye sockets are alien-like, but they’re filled with pools of splashing blood instead of grey eyeballs. His breath is as cold as death. It’s a cold that has its own way of indicating that your end is near once it reaches the back of your neck. Just ahead at the edge of the forest is a Caribbean beach with a bikini-clad blonde extending a cocktail in one hand and showing you a lounge chair with her other hand. You can only assume she’s prepared to offer a massage so you can forget all your worries. While that dream is on the horizon, you know you will never make it there. The stench of rotting corpses on the forest floor around you is a forbidding reminder of your future. You’re ready for this teasing nightmare to end and to deal with the consequences, but it never ends. It’s a constant offering of false hope and terror in which there is no escape. It’s your personal purgatory, and it’s a life that you will live for eternity.

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That’s what it has been like owning DreamWorks Animation over the past few years. It has simply been a nightmare. The days of the average DreamWorks Animation movie grossing $150 million seem to be over. The latest release, Rise of the Guardians, has only grossed a little over $40 million so far. Considering the cost to make the film was $145 million, that’s quite a flop. DreamWorks Animation has released 23 films to date, but it has been a while since we have seen winners like How to Train Your Dragon, Kung Fu Panda, or Antz. DreamWorks Animation will always have its loyal followers that watch every release, but it takes a lot more than just loyal followers to make a nice profit.

Let’s take a look at some numbers to see if we can find any hints for what the future holds.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for DreamWorks Animation is impressive. Surprisingly, it’s even more impressive than the debt-to-equity ratio for The Walt Disney Company (NYSE:DIS). Lions Gate Entertainment (NYSE:LGF) is in a world of hurt in this area. We’re including Lions Gate Entertainment for comparative purposes to a more traditional production company.

The balance sheet for DreamWorks Animation isn’t on the plus side, but it’s in decent shape. Once again, it’s in better shape than its competitors.

Debt-To-Equity

Cash

Long-Term Debt

DWA

.14

$130.70 Million

$200 Million

LGF

9.79

$61.03 Million

$1.09 Billion

DIS

.34

$3.39 Billion

$14.31 Billion

 

T = Technicals on the Stock Chart Are Poor

Without any big hits over the past few years, DreamWorks Animation’s stock price has suffered. It has been left in the dust by Lions Gate and Disney.

1 Month

Year-To-Date

1 Year

3 Year

DWA

-21.02%

1.24%

-6.61%

-56.79%

LGF

.68%

86.24%

79.34%

157.80%

DIS

-2.85%

30.75%

35.36%

65.30%

 

At $16.80, DreamWorks Animation is currently trading significantly lower than all its averages, including its 50-day SMA of $19.32, its 100-day SMA of $18.71, and its 200-day SMA of $18.35.

 E = Earnings and Revenue Are Inconsistent

Revenue and earnings for DreamWorks Animation have been very inconsistent over the past five years. While revenue has been relatively stagnant over that stretch, earnings have been on a decline.

2007

2008

2009

2010

2011

Revenue ($)in millions

767.18

650.05

725.18

784.79

706.02

Diluted EPS ($)

2.17

1.57

1.73

1.96

1.02

 

Quarterly revenue and earnings have also been inconsistent, but Q3 YoY saw a modest improvement in both areas.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

160.76

218.97

136.08

162.80

186.30

Diluted EPS ($)

.23

.29

.11

.15

.29

 

T = Trends Support the Industry

There have been some interesting developments in the industry. The most interesting development is something that will indirectly affect DreamWorks Animation. Luckily, it will be in a positive way. Netflix (NASDAQ:NFLX) just completed a licensing deal with Disney. This will draw more people to Netflix, which will then greatly increase the odds of DreamWorks animation films gaining more exposure since Netflix owns the rights to DreamWorks Animation’s films.

3D also remains popular on the big screen, and DreamWorks Animation has two 3D movies being released over the next six months. One is called The Croons. This is advertised as a prehistoric comedy, but it’s more of a visual treat than a comedy. The concept is that a family has never left their cave but one day ventures out (we won’t ask about how they managed to feed themselves when living in the cave.) After leaving the cave, they go on a wild adventure exploring the world. There is a trailer available if you’d like a sneak peek. The title is not appealing, which is a big negative for a younger audience, but it does look as though it’s worth seeing from a visual standpoint. The other 3D film, Turbo, is about a snail who wants to be the fastest snail in the world. There isn’t much information on this movie yet, but we do know that it will be released in early summer.

Conclusion

With an enormous short position of 41.50%, there are many people betting against DreamWorks Animation. This industry is easier to read than most because you can make a somewhat accurate prediction on the success of a film based on critic reviews and the trailer prior to a film’s release. There’s a good chance that shorts studied Rise of the Guardians prior to placing their bets. With the Fiscal Cliff approaching, it’s not likely for shorts to cover their positions now. After the Fiscal Cliff, they will likely study The Croons and Turbo to the best of their ability and make an educated decision.

Based on all this information, you likely think we will recommend avoiding the stock. However, that’s only the case for the short term. For the Fiscal Cliff factor alone, this is currently a WAIT AND SEE. On the other hand, it’s important to understand that production companies with huge hits in the past are likely to have huge hits again down the road. It might be six months and it might be two years, but it will happen, especially when the debt-to-equity is strong, the balance sheet is respectable, and there is cash flow available. This means there is staying power. Early to mid-2013 may present the best buying opportunity.

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