Dreamworks Animation: Ignore Downgrades, 5 Reasons Why Stock Hits $30

| About: Dreamworks Animation (DWA)

Summary

Analysts continue to downgrade Dreamworks Animation shares, causing big moves downward.

Television and consumer products continue to be growth segments.

Investors and analysts may be missing several key overlooked items like Kung Fu Panda 3's China release date and a television hire.

Dreamworks Animation (NASDAQ:DWA) is a popular analyst stock in the media sector. With only two theatrical release every year, analysts love coming in with downgrades before or after the releases. After all, for years one poor release for the company could mean a huge loss on the year. Now with Dreamworks Animation's diversification efforts, investors may be ignoring other segments that are going to have a bigger impact on the company's growth and ultimately its future.

For every analyst that's bullish on Dreamworks Animation shares, you can find multiple bears. That's because over the last few years, Dreamworks has cut the number of movies it releases and relied too heavily on box office revenue. When a movie misses, it ruins the whole year in terms of profits and analysts' expectations. As the company continues to diversify, analysts are over relying on the box office revenue and not focusing on the key growth segments. Back in October, Merrill Lynch cut shares to a hold rating and set a new price target of $21 per share. In January, B. Riley lowered its price target to $27 with a neutral rating.

Dreamworks Animation has enough firepower to have a great 2016 and hit $30 a share with these five items.

Television

I have discussed television before and its potential for Dreamworks Animation and its importance in the company's diversification efforts. In the recently reported third quarter, Dreamworks saw television segment revenue more than triple to $51 million. It was also important to note that operating margins improved to 30% in the third quarter. Through the first nine months of the fiscal year, television revenue now stands at $123.2 million, an increase of 136%. Gross profit for the segment in nine months was $37.9 million.

Recently, Dreamworks Animation expanded a deal with Netflix (NASDAQ:NFLX) to add additional content. This strengthens one of the key pieces to Dreamworks' future. The new deal calls for new originals and streaming rights to feature film library titles from Dreamworks Animation. This includes additional content for the shows "The Adventures of Puss in Boots", "Dinotrux", and "Dragons: Race to the Edge". The deal also highlighted new content that includes "Trollhunters" from Guillermo del Toro and a re-imagining of "Voltron".

In December, Dreamworks Animation also signed a television content deal with DHX Media, a leader in Canadian media. The five year deal will see 130 episodes of animated children's content co-produced. DHX will distribute in Canada and Dreamworks Animation will distribute in the rest of the world. This is a great deal for Dreamworks as it gets the rights to the content in every territory but Canada. That means more revenue will continue to come in and new deals for the distributing of this content could be announced at various times. Along with the new content, DHX licensed 1000 half hours of old content from Dreamworks Animation to be the exclusive licensor in Canada.

The DHX deal also includes AwesomenessTV content, as DHX will handle distribution of that in Canada. That's another big win for Dreamworks. The best news for investors could be this "licensed content to begin as early as June 2016". That means this DHX deal could have an impact on the guidance listed below.

On the third quarter call, Dreamworks stood behind its fiscal 2016 television segment revenue range of $200 to $250 million. While that figure doesn't sound like a lot, it represents around 25% of annual sales for the company.

2016 Movies

On January 29th, "Kung Fu Panda 3" will be released in both of the largest box office countries simultaneously: the United States and China. This is incredibly important to Dreamworks Animation and the potential of its box office run.

Here's a look at the box office success of the prior two films in the franchise:

Kung Fu Panda

Kung Fu Panda 2

Domestic

$215.4 mil

$165.2 mil

International

$416.3 mil

$500.4 mil

Total Box Office

$631.7 mil

$665.7 mil

Opening Domestic

$60.2 mil

$47.7 mil

Highest Domestic Screen #

4114

3925

China Revenue

$26.0 mil

$92.2 mil

International Territories with $20 Million

10

7

Click to enlarge

There are plenty of takeaways from this chart. First off you can see that the international box office of "Kung Fu Panda 2" helped the sequel outperform the first movie, despite a weaker domestic tally. In fact, the sequel opened at number two in North America behind "The Hangover 2", which grossed $85.9 million its opening weekend.

The big takeaway of course is the big jump the sequel saw from the Chinese market. The $92.2 million grossed by "Kung Fu Panda 2" in the most populous country made it the highest grossing animated movie there. While the sequel did $20 million in less countries, the success from China and South Korea ($41.1 million) made up for that.

The release schedule for "Kung Fu Panda 3" sets the movie up for a strong debut in both the United States and China. In the United States, the movie goes against "Fifty Shades of Black", "The Finest Hours" and "Jane Got a Gun". There is some competition from animated "Norm of the North" that just came out but a 2.4 rating on IMDB and a 0% on Rotten Tomatoes show the movie might fade fast. The next animated movie comes out in March with Disney's "Zootopia" hitting the big screen on the 4th.

To show just how popular "Kung Fu Panda" is in China, take a look at these figures. The country showed the movie on this past Saturday as a preview event. The movie sold $6.4 million in tickets for the one day limited release window. "Kung Fu Panda 3" will be the first animated movie to be released in two language versions in one country. The movie will be released in English and in Mandarin in China. The company hopes that means multiple visits for moviegoers in China.

While the January release may seem weak to Americans, it is a huge deal for China. The movie will be released in one of China's most desiring opening times. The movie comes as kids are on winter school break, around the Chinese New Year (a popular movie going time), and Valentine's Day.

Later in 2016, Dreamworks Animation's second and last theatrical release of the year "Trolls" will be released. The movie comes out on November 4th and stars the voice talent of Justin Timberlake and Anna Kendrick. "Trolls" will face decent competition going up against "Doctor Strange", but it will be the first kids/animated release in more than a month, which could lead to increased box office from families. The movie also won't face a direct competitor in the family/animated genre until "Moana" from Disney on November 23rd.

Buyout Potential

It's hard to recommend buying shares of a stock as a buyout rumor, as after all not all deals ever come to fruition, and certainly not all close as expected. In Dreamworks Animation case, 2015 saw several rumors and shares respond as a result. The company seems committed to selling itself if it gets the right price. I believe this means 2016 could see a buyout or at least another rumor from a new company.

Hasbro (NASDAQ:HAS) and Softbank (OTCPK:SFTBY) were the two rumored acquirers in 2015. Hasbro was rumored to be paying $35 a share and using the deal to turn into a media powerhouse with its television and consumer products. I think a combines Hasbro/Dreamworks Animation would be a great company and could quickly become a powerhouse. However, that deal would also be awkward for Hasbro's existing relationship with Disney (Star Wars, Marvel), a direct competitor to Dreamworks Animation.

Softbank was rumored to be paying $32 a share to buy Dreamworks Animation. That represented a $3.4 billion buyout at the time. For some perspective, Disney paid $7.4 billion to acquire Pixar. Disney also paid around $4 billion for each of Marvel and Lucasfilm.

While it sounds completely absurd, what about Disney acquiring Dreamworks Animation? I normally wouldn't bring it up as it is slightly farfetched. However, a fellow SA author brought up many good points on why Disney's new CEO in 2018 should make a run at Dreamworks Animation assuming it doesn't get acquired before then.

Consumer Products

Consumer products is an area that continues to be undervalued for the company. With its small stable of movies and characters, the segment is still in the growth stage. The good news is the two movies being released in 2016 and other library characters should follow up a successful 2015 that saw tremendous growth.

The third quarter had a reported $27 million in revenue for the consumer products segment. This was more than double the amount from the prior year. Gross profit for the segment grew to $16 million, representing strong margins as well. This figure along with the prior two quarters puts the company ahead of its guidance for this sector for the current fiscal year. Through the first nine months, consumer products revenue is now $54.8 million.

The company said it will have a modest consumer product campaign around "Kung Fu Panda", but will be aggressive expanding the brand through licensing in China. The good news for investors is the other 2016 release will have the biggest consumer product push ever done by this company. From the third quarter call, "The biggest opportunity for us in the consumer products feature area is with Trolls".

Dreamworks Animation hired Shawn Dennis to head the Trolls brand. Dennis comes from American Girl as the head of that brand. I think this is a good sign for how much the company is putting behind re-launching Trolls as a huge consumer product brand. The 2016 holiday season could see a big push with this brand, which could also extend the screen life of the movie.

Live Television

Now, I start this one with a disclaimer. I don't think there will actually be any 2016 live television shows made, but I could of course be wrong. I believe though when deals are announced for Dreamworks Animation's live television content to hit regular channels or cable channels, analysts' hands will be forced. This is another potential growth area for the company and there are two big reasons why I think analysts are underestimating.

The big item investors and analysts may be missing is the hiring of Katie O'Connell Marsh as head of global live action television. Marsh said she was "impressed by the endless possibilities and unique specificity of the opportunities that lie ahead." Prior to joining Dreamworks Animation in January, Marsh was the CEO of Gaumont International TV, which she built from the ground up. Gaumont is behind television shows like "Hannibal", "Narcos", "Hemlock Grove", and "F is for Family". Prior to that job, Marsh was an executive at NBC and helped with shows like "Lipstick Jungle" and "30 Rock".

Dreamworks Animation went after someone with a lot of experience creating hit shows and got the right talent here. It's also worth noting that "Narcos", "Hemlock Drive", and "F is for Family" are all shows on Netflix. So combine Dreamworks Animation's history of doing animated content for Netflix and their new live television head's relationship with Netflix, and you see how quickly the company could get some content going for the streaming giant.

The other big reason why I think live television is the right push for the company is its 2013 acquisition of Classic Media. I was a huge believer of this deal as it gave the company a huge library of recognized brands that it could boost through licensing and consumer products. It can now exploit those characters through new television shows. As a refresher, Classic Media includes characters like: Archie, Dick Tracy, Felix the Cat, Frosty the Snowman, George of the Jungle, Gumby, Richie Rich and Underdog.

Conclusion

On February 22, Dreamworks Animation will present full year earnings and fourth quarter results. That should provide a much needed update on television and consumer product revenue and guidance going into fiscal 2016. The company will likely be pressed to see if the recent television deals will cause the company to update 2016 guidance or if it will be seen later on.

Analysts on Yahoo Finance call for 2016 earnings per share to hit $0.71. That comes after a likely loss in fiscal 2015. Revenue is expected to rise 15% to $1.0 billion in fiscal 2016. Again, I see these figures ready to be guided up with the additional television and consumer product revenue coming in, and helping boost margins. Add in an above average performance from "Kung Fu Panda 3", "Trolls", or both and you have some upside to both those figures.

There is always a risk with Dreamworks Animation having box office flops. However, I just don't see "Kung Fu Panda 3" or "Trolls" flopping and think if both those movies do decent, the additional television and consumer products revenue are going to cause this stock to take off again. I see shares hitting $30 despite the bearish analysts.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in DWA over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.