DreamWorks To Gain From Releases, Video Deals Amid Risks

On Dec 1, we issued an updated research report on DreamWorks Animation SKG Inc. (DWA – Analyst Report).

DreamWorks posted positive earnings surprises in the last four quarters, with the average being 82.59%. The company reported third-quarter 2015 results wherein both the top and the bottom line surpassed the Zacks Consensus Estimate.

DreamWorks has taken several initiatives to improvise on its film making process and significantly cut down production costs. In the third quarter of 2015, the company witnessed 43% year-over-year growth in revenues, mainly driven by improvement across all the operating segments.

Furthermore, selling and marketing expenses contracted 24% year over year in the reported quarter. In addition with the release of the hit franchise flick Kung Fu Panda 3 and Puss in Boots in 2016, the company’s film business will certainly drive top line growth going forward. Moreover, a debt free balance sheet and a strong cash position are likely to help the company achieve its expansion goals.

DreamWorks’ AwesomenessTV (ATV) struck a multi-year deal with global content creator, producer and distributor Endemol Shine Group. The deal will certainly enhance the global presence of AwesomenessTV. Meanwhile, Alphabet Inc. (GOOG) entered into an agreement with DreamWorks for the release of several feature films on the combined platform of the companies’ respective divisions – YouTube and AwesomenessTV – over the next two years. Such a partnership will significantly drive DreamWorks’ top line.

However, volatility in the movie business, escalating marketing expenses and limited number of movie releases may impact earnings going forward. Unlike Viacom Inc. (VIAB – Analyst Report), DreamWorks lacks business diversification as the company’s Feature Film segment contributes nearly 75% of its total revenue. To worsen matters, DreamWorks has no movie slated for release this year which is a major concern.

Also, the success of a movie largely depends on the preference of the audience as well as the timing of the release. Moreover, volatile currency movements may hurt profits in the future.

DreamWorks currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the same space is Twenty-First Century Fox, Inc. (FOX – Snapshot Report) with a Zack Rank #1 (Strong Buy).