DreamWorks (DWA) Profits Hit by Fewer Films, Lack of Variety

On Jan 9, 2015, we issued an updated research report on DreamWorks Animation SKG Inc. (DWA).

DreamWorks delivered positive earnings surprises in two quarter last year, with an average miss of a negative 62.91%. However, in the third quarter of 2014, the company’s top and bottom line surpassed the Zacks Consensus Estimate.

DreamWorks’ films are comparatively more capital intensive than their box-office opportunities. The company’s latest release, Penguins of Madagascar, garnered lower-than-expected revenues at the U.S. box-office. The disappointing performance can be mainly attributed to the timing of the release as several big-budget movies like The Hunger Games: Mockingjay – Part 1, Disney’s Big Hero 6, The Hobbit: The Battle of the Five Armies and Christopher Nolan’s Interstellar had also hit the theaters in the same time frame. Meanwhile, the company apprehends that operating expenses will escalate further in the fourth quarter of 2014 which in turn will impact margins.

Unlike Viacom Inc. (VIAB), DreamWorks lacks business diversification as the company’s Feature Film segment contributes nearly 75% of its total revenue. Even, smaller movie production and distribution houses like Lions Gate Entertainment Corp. (LGF) releases more than 20 movies every year as compared to only three to four releases by DreamWorks.

Also, the film business holds several risk factors. Moreover, higher promotion and distribution expenses coupled with the implementation of new technologies will impact margins even in the future. Further, the success of a movie largely depends on factors like the preference of the audience as well as the timing of the release.

DreamWorks currently carries a Zacks Rank #5 (Strong Sell). A better-ranked stock in this sector is Bona Film Group Limited (BONA) with a Zacks Rank #1 (Strong Buy).