DreamWorks Animation’s Growth Largely Dependent on Sequels

On Aug 14, 2014, we issued an updated research report on DreamWorks Animation SKG Inc. (DWA).

DreamWorks delivered a positive earnings surprise in one quarter last year, with an average beat of a negative 19.37%. In second-quarter 2014, the company missed both the top and bottom line of the Zacks Consensus Estimate.

DreamWorks has taken several steps to improvise on the film making process to significantly cut down production costs. Sequel films often generate impressive box-office results and are always less risky investment-wise. The recently released flick “How to Train Your Dragon 2” garnered nearly $487 million at the box-office worldwide and will certainly boost the company’s Feature Film segment going ahead.

DreamWorks’ upcoming films include Penguins of Madagascar, Kung Fu Panda 3 together with sequels of The Croods and Puss in Boots. The highly successful franchise Madagascar 4, scheduled to release in the upcoming holiday season, is also poised to bolster the company’s top line moving ahead.

Meanwhile, DreamWorks has entered into an online streaming agreement with Netflix, Inc. (NFLX). Further, the company launched its online TV channel, DreamWorks TV, on Google Inc.’s (GOOG) YouTube. This multi-platform media service will combine DreamWorks’ original content library with the digital content delivery expertise of its recently acquired Awesomeness TV (ATV), thus making it a much lucrative venture.

Although sequel films are more profitable and have always generated over $600 million in worldwide box-office sells, the life-cycle of these films is limited. This implies that the company cannot solely depend on these franchisees for revenue generation over the long haul. Thus, DreamWorks should ideally come up with new films to spur future growth.

The film business holds several risk factors. Moreover, higher promotion and distribution expenses coupled with the implementation of new technologies will continue to impact margins moving ahead. Also, the success of a movie largely depends on the preference of the audience as well as the timing of the release.

DreamWorks currently carries a Zacks Rank #3 (Hold). A better-ranked stock worth considering in this sector is Lions Gate Entertainment Corp. (LGF) with a Zacks Rank #1 (Strong Buy).