Can DreamWorks Animation Wake Up and Smell the Profit?

Cutesy title, but an honest question. DreamWorks Animation SKG, Inc. (NASDAQ: DWA) is the studio behind familiar animated titles such as Shrek, Kung Fu Panda, How to Train Your Dragon, Madagascar, and most recently, Home. Those are some household names right there, especially for those of us with kids. Ok, I don’t have kids, but I watch animated films for investment purposes.

Take a look at their website, how many movies do you recognize?

DreamWorks Animation

Unfortunately for DreamWorks, many of their films aren’t really household names. Several recent movies have disappointed shareholders. Early this year DreamWorks cut its workforce, stating that it would focus on making two films a year instead of three. Quality over quantity sounds great, but if a movie bombs, then it could potentially hurt the company more so than in the past. Kung Fu Panda 3 comes out in January, and a lot of the company’s hopes seem pinned on this being a success. 1 and 2 were certainly hits, and this investor is looking forward to 3. (For investment purposes, of course)

So the movie segment seems a bit iffy, right, so what does this company have going for it? Diversification of income is a big part of the story here. One branch of this story is their TV segment. DreamWorks has partnered with Netflix (NASDAQ: NFLX) to create original content for the streaming giant. According to the DreamWorks website, that consists of 12 original series from 2013 to 2017. These shows are popular, hinting that the partnership could continue well past 2017. Netflix has been pretty aggressive lately in acquiring original content, and children are huge consumers of entertainment.

Another part of the TV segment is AwesomnessTV, a popular teen network on YouTube. Dreamworks acquired AwesomnessTV in 2013. ATV is currently creating content for Verizon Communications’ (NYSE: VZ) Go90 mobile video service. The TV segment appears very strong at DreamWorks. Revenue for this segment more than doubled, year over year, to 55 million in Q2.

Consumer products (toys), however, were not so hot. In the Q2 conference call last week, there was a lot of talk about how disappointing this segment was. The company said that it would probably not meet previous year end guidance for this segment. A lot of the blame seemed to be placed on merchandise based on ‘non-feature’ content. So, maybe toys based on the Netflix originals aren’t so hot? Also FX pressures didn’t help the picture either.

Live entertainment is another area of diversification the company is pursuing. Royal Caribbean Cruises, Ltd (NYSE: RCL) offer The DreamWorks Experience on select ships, offering live shows, character meet and greet, etc… There are even theme park attractions such as DreamWorld Australia, and rides at Universal Studios Singapore.

The company seems to have a lot of fires burning, but pretty much everything comes down to creating popular movies that will attract moviegoers, sell DVD’s and digital downloads, move toys off of shelves, and bring people in to see live entertainment based on said movies. So while this diversification is great, pretty much everything hinges on pounding out popular movies, year, after year, after year. These ancillary businesses should be poised to make big bucks for the company if the hits keep coming, but if not…

So what’s a cartoon loving investor to do? The stock has been hit HARD the past year and a half, coming off a high of $36.01 to where it’s currently trading, around $19.50. The company lost 45 cents a share in Q2, hammering the stock down to current levels, near its 52-week low of $18.16. The ‘good’ news is that the company expects 2015 to be a breakeven year, or perhaps slightly better, if we ignore the costs of the recent restructuring. So, what to do?

Personally, I’m going to hold off on DreamWorks at these levels, but I’m keeping an eye on the company. I believe that a few hit movies and a couple of good quarters would send this stock skyrocketing, but I feel like the risk is a bit too much to buy in around $20. The 5 year low (all time low, actually) is around $16. I’d feel better getting in closer to $16 than $20. A few bad weeks in the market just might get me there.

As always, feel free to look at my portfolio and see how I’m doing. And please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender