DreamWorks Animation (DWA) shares fell 5.2% to $26.40 after Vasily Karasyov, CLSA analyst initiated coverage with a “sell” recommendation and a target price of just $17.
“A comparison of historical consensus estimates and actual results shows that the consensus repeatedly proved to be too optimistic about DWA’s future performance and by a wide margin,” Karasyov says. Indeed, analysts’ average forecasts for DWA’s cash flow “were wrong every year since the company’s IPO and the median variance is $84 million.”
Karasyov thinks the company is likely to see “a drastic uplift in Film profitability and TV revenue growth and margin,” knowing that Jeffrey Katzenberg has vowed to cut movie production costs and diversify revenues by boosting television, online video and consumer products. The company began restructuring in January to support the new direction Katzenberg planned to take the company, all in response to battle under-performing movies.
Released this year, and the only film released in 2015, Home has already generated $363Mil in worldwide box office sales, but with high production costs, as well as marketing and distribution costs, the film is suspected to only add $16 Mil on the studio’s cash flow. If the distribution costs end up matching previous film releases, then it would have resulted in another write-down.
The future release plans are more optimistic, in that DWA expects to see $100 Mil profit from Kung Fun Panda 3 which releases in January 2016, and another $25 Mil from Trolls which releases in November 2016. The subsequent year also looks promising with an anticipated $25 Mil from Boss Baby and $104 Mil from The Croods 2 (releasing January and December 2017 respectively). If Katzenberg’s numbers are correct, then the next four films could profit more collectively than the previous 10 which together made $206 Mil.