DreamWorks Animation (DWA, Equal Weight) faces another tough day while its shares declined by more than 12% and reached to 52-Weeks low after missing second-quarter results consensus expectations. Company is likely to face shareholders class-action lawsuits on top of weak performance while reported revenue $122.3 million was far below than $138.5 million estimates. The earnings of (-$0.18) per share was almost $0.16 below our estimate.
SG&A expenses of $54.6 million touched highest level, which is nearly 44.6 percent of sales and we believe that expenses will grow in future. While company was expecting a lot profitability and high return from “How to Train Your Dragon 2”, it failed to win distributor’s trust, although we movie has collected nearly $424 million at box office as per estimation worldwide against $495 million for first part of movie. While it is still running abroad, movie is nearly 19% below compare to first part’s collection in same time frame. This clearly shows the sequel is not likely to outcast first part.
Management is positive about “The Penguins of Madagascar” movie to be launched in November this year, considered as big revenue opportunity. However now it is planned to switch release date with ‘Home’ in March 2015. The idea remains unclear to us after switch but it will cost $135 million additionally to company. While taking route of diversification, company is earning great from AwesomenessTV with 100 million subscribers. Home video market and television remain other sources of income for company.
While DVD market is on decline, content sale through digital medium is growing with Amazon and Netflix alike distribution firms. Netflix has agreed use licenses of 1,200 animated TV series at least for another five years which has become steady income source for company. While SEC investigation on Turbo write-down (4Q13) being conducted, we see great strategic and operational risks with lot of uncertainty until company’s future prospects remain clouded.
We reduce company’s full year EPS estimate by $0.15 per share. We are also reducing price target to $20 from previous $16 with likely upside of 6% in stock price and maintain ‘Equal Weight’ rating. We also warn investors to find better margin of safety for highly uncertain stock.