Shares of Dreamworks Animation SKG Inc (DWA) saw a 8% haircut in after-hours trading. The company reported second quarter earnings Tuesday night and saw shares fall after missing analysts' expectations.
Dreamworks Animation reported (earnings call) revenue of $162.8 million for the second quarter. Net income came in at $12.8 million, representing $0.15 in earnings per share for the quarter. Analysts had been calling for $0.25 in earnings per share on $186.17 million in revenue. Dreamworks Animation, missing on both, sent shares down and will likely cause shares to fall Wednesday.The decline in share price represents a great chance to buy shares of Dreamworks Animation during Wednesday's trading session.
Here's the biggest reason to buy Dreamworks Animation shares; television. Today the company hinted at creating its own television network. During the call, Chief Executive Officer Jeffrey Katzenbeg said that there is, "idea of a Dreamworks branded channel whether that's a digital channel or cable or otherwise domestically, internationally." The new television channel would be a place to showcase Dreamworks Animations animated movies and also its recent television series. Dreamworks has also likely seen this as a possibility thanks to its acquisition of Classic Media.
I wrote about the acquisition of Classic Media before it happened and pointed out the reasons I was bullish. Classic Media is being acquired by Dreamworks for $155 million. The deal gives Dreamworks Animations over 100 characters that have already been turned into movies and television shows. In a move to create its own television channel, Dreamworks Animation can reboot some popular Classic Media characters like Rocky & Bullwinkle, Archie, Dick Tracy, Where's Waldo, Lassie, and George of the Jungle.
I argued that the Classic Media acquisition also bode well for Dreamworks Animations push into theme parks. In July, Dreamworks announced it was partnering with a brand new New Jersey mall to create a theme park featuring Dreamworks Animation characters. I become more bullish on shares of the animation company as it diversifies its base away from just motion pictures. By partnering with theme parks and television, Dreamworks Animation can test its big movie releases prior to their releases. The company also sees a different level of cross-promotion tools with a television and movie segment.
Dreamworks Animation's television segment continues to grow even before a deal is made. The company will roll out Dragons, Riders of the Berk soon. The television show will be the first for Dreamworks to premiere on Cartoon Network. Other television shows from Dreamworks Animation include:
- Toonsylvania, 1998-1998, Fox Kids
- Invasion America, 1998-1998, The WB
- Alienators: Evolution Continues, 2001-2002, Fox Kids
- Father of the Pride, 2004-2004, NBC
- The Penguins of Madagascar, 2009-present, Nickelodeon
- Neighbors From Hell, 2010-2010, TBS
- Kung Fu Panda: Legends of Awesomeness, 2011-present, Nickelodeon
- Future Earth, will premiere 2012, Discovery Channel
- Monsters vs. Aliens, 26 episodes ordered by Nickelodeon, not yet created
Dreamworks Animation has also created many short movies or holiday specials based on many of its characters from movies. Shrek, Kung Fu Panda, and characters from Madagascar have all gotten the holiday treatment by Dreamworks Animation.
A television channel would also put Dreamworks on the same level of Hasbro (HAS) and Disney (DIS) to be able to showcase its characters on television to experience the licensing power. Hasbro is partners with Discovery Communications (DISCA) in the HUB, a children's television network. Hasbro sees shows with its toy lines like Transformers, My Little Pony, and G.I. Joe showcased on the HUB. The channel serves as an important branding tool by Hasbro to capture television revenue and also see increases in sales of toys showcased on television.
I see Dreamworks partnering with Viacom (VIA), parent company of Nickelodeon. Dreamworks needs a large media company to distribute its animation movies, and also create its television channel. Dreamworks has said that it will make an announcement by Labor Day of how it will distribute movies going forward.
Prior to the earnings report, shares were trading up 16% in calendar 2012. After the decline, shares will still be up on the year. Shares began 2011 at around $30 a share and lost over 40% of their value in the year. A television deal is no sure thing for Dreamworks Animation. The company also faces the potential of distributing movies on its own if it can not reach an agreement with another company. However, Dreamworks Animation is clearly making moves away from movies by securing the rights to Classic Media's characters, partnering on theme parks, and moving into television. Shares are too cheap if any of those three turn out positive.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DWA over the next 72 hours.