Remember when Dreamworks Animation Skg Inc (NASDAQ:DWA) was supposed to ascend to the media mountaintop?
The entertainment conglomerate headed by film king Stephen Spielberg, music mogul David Geffen and Walt Disney Co (NYSE:DIS) darling Jeffrey Katzenberg had huge hopes, but those dreams are just sad storyboards from yesteryear.
Nowadays, DWA stock is taking a beating. How can this happen, you ask, when the company has created multi-installment celluloid sensations like the Shrek series and How to Train your Dragon?
I’ll tell you how …
DWA Suffers Several Losses
Poor showings by the Penguins of Madagascar, which resulted in $55 million in impairment charges, along with Mr. Peabody and Sherman, for which DWA took a $57 million write-down, crushed the company’s bottom line.
DreamWorks chief Katzenberg promised analysts that he’s on the job. “My time and my focus needs to be on making blockbuster films,” he said. “That’s where my energy is going to be focused.”
Katzenberg’s pledge to write the ship came with more bad news, though — a major slash to its work force. DreamWorks is axing 500 employees, about 20% of its staff, and that includes top-level execs Dawn Taubin, head of marketing and COO Mark Zoradi.
Don’t forget that this is the second major layoff in the past 12 months. DWA cut 350 employees last February too.
Pounding Down Production
DreamWorks is also clamping down on production, reducing its annual output of movies from three to two. Sure, DWA is claiming this move will “ensure the consistent and profitable delivery of high-quality films,” but with an output of just two films a year (one new film and one sequel), the margin for error is practically nonexistent.
Plus, cutting back hurt DWA even more in the pocket up front, triggering an additional $200 million impairment charge.
The analysts agree: DWA stock should be avoided. Several firms are lowering both target prices and ratings.
Sure, Spielberg revolutionized movie making, but it seems like his name is basically on the door for good looks and DWA is Katzenberg’s ship to steer (or crash). But how much impact could either have on what amounts to one new movie concept a year.
The film business is tougher than ever, so if you want a safer play, look at companies that don’t just make a couple movies a year.
The Walt Disney Co (NYSE:DIS) is one of the safest plays in the market. DIS is incredibly diversified, with major stakes in television, theme parks and merchandise. If you want to compare apples to apples, look at Lions Gate Entertainment Corp. (USA) (NYSE:LGF). LGF plans 16 major film releases through 2016, and unlike Dreamworks, is expected to grow earnings in each of the next two years.
Bottom line: If you’re itching to click the buy button, stay away from DWA stock. You’ve got better options.
As of this writing, Scott Michnick did not hold any interest in the aforementioned securities.
