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Will 2014 Be DreamWorks’ Glory Year?

April 23, 2014 | About:
Patricio Kehoe

Patricio Kehoe

7 followers

DreamWorks Animation SKG Inc. (DWA)’s fourth quarter results came in somewhat short compared to management’s estimates, with quarterly revenue amounting to $204 million, 62% ($127.9 million) of which was accountable to the company’s film segment. While “Madagascar 3” brought in solid box office sales, reeling in $11.4 million, “Turbo” underperformed, costing the firm $13.5 million. And now it appears the “Mr. Peabody & Sherman” franchise might take the same road, as up to last week it had only managed to gross $143 million from domestic and international box offices. However, investment gurus Paul Tudor Jones (Trades, Portfolio) and Jim Simons' (Trades, Portfolio) hedge fund have been placing their bets on this media giant in the past few months, as the television and consumer products segment is expected to grow significantly in the future.

Broadening the Revenue Stream

Although DreamWorks gained its market share over the past 15 years as an animated film developer, producing hit franchise films like “Shrek” and “Madagascar,” the company is now shifting its growth strategy towards the higher margin television segment. After the 2012 acquisition of Classic Media, the company entered into a licensing agreement with Netflix Inc. (NFLX) for 1,200 animated television episodes, to air over the next five years. Furthermore, the firm announced at the beginning of April that it would be hiring ex-Turner Animation’s chief marketing officer, Brenda Freeman, to market and promote the upcoming kids programming. Considering the high demand for children’s television content and Netflix’s audience reach, management expects this long-term strategy to translate into $200 million annual revenue by 2015 from the segment, up from 2013’s $100 million.

Furthermore, the Classic Media purchase is finally paying off, as its brands have helped boost television revenue to $47.1 million in quarter four, compared to quarter three’s $18.2 million, which is impressive. Not unlike The Walt Disney Company (DIS), DreamWorks is also looking to expand from its film and television content to consumer products, and the upcoming deal with Hasbro Inc. (HAS) will contribute to gaining stronger foothold in the toy market. Moreover, the company’s breach into the theme park world became clear a couple of months ago, when the firm entered a partnership with Merlin Entertainment to place the DreamWorks’ heroes at six attractions until 2023. In addition to this, a new revenue stream for 2015 will stem from the new publishing unit, Press, which will offer print and digital books, thereby helping to offset weak years of theatrical releases.

Hit or Miss?

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Despite a rough 2013, which showed weak financial results as movie releases underperformed and the integration of Classic Media was still under way, 2014 may just as well be a comeback year for DreamWorks. Not only will the firm launch three movies for each of the next three years (instead of two), but this year’s theatrical release of “How to Train Your Dragon 2” is expected to gross $600 million to $700 million worldwide, due to the success of the prequel. In addition to the secondary revenue streams, which are now growing at a faster pace, investors can expect revenue growth to average an annual 7% until 2019, thereby surpassing the $1 billion mark.

On another note, the company’s operating margin, which has been declining consistently over the past few years, regained strength during fiscal 2013, closing at 10.8%. As the higher margin television business continues to grow, this metric should average 22% (by 2017), while the current ROE of 3.9% continues to increase. Earnings have also recovered significantly, from 2012’s -$0.43 to a current $0.65, and the trend is expected to carry on, closing fiscal 2014’s EPS at $0.90. So, DreamWorks may not be Disney in terms of profitability, but the company is certainly regaining its momentum. I feel bullish about its long-term future.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

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