Zacks Equity Research

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Zack’s Bear of the Day: DreamWorks

Computer animation has come a long way over the last several years. I remember being in awe when I first watched “Toy Story” and now you can make something just as sophisticated using a laptop and Adobe software. It takes much more than just great animation to make a great animated movie. It takes a witty scripts, lovable characters and a gripping plot. Lately, our Bear of the Day has been striking out at the box office time and again with title that fall short.

Dreamworks (NASDAQ:DWA) is a Zacks Rank #5 (Strong Sell) that’s been having a tough time putting cheeks in seats at the movie theater. The studio has taken millions of dollars in write downs on films like “The Penguins of Madagascar,” “Turbo,” “Rise of the Guardians” and “Mr. Peabody & Sherman.”

CEO Jeff Katzenberg expects the company to return to breakeven with year. He unveiled a plan to focus on the company’s television, consumer products and licensing and digital business. This year Katzenberg is looking to generate between $200 million and $250 million this year from television, up from $100 million in 2013. He’s hoping this area does well given the 30% profit margin the company enjoys from its digital distribution deals.

Analysts have been mixed on the stock, with earnings expectations dropping for the current quarter and current year. While two analysts have dropped earnings estimates for the current quarter, one analyst has increased. But if you look at the current year estimates, six analysts have revised to the downside over the last 60 days compared to only two raising.

This has dropped consensus for the current quarter from an 11 cent gain to a Zacks Consensus Estimate of a 32 cents per share loss. For the current year the numbers are even worse. Consensus has tanked, dropping from an 80 cent per share gain to a 28 cent loss.

It’s no wonder that the stock has struggled mightily over the course of the last several months. If you look at the price and consensus chart you can see how the stock price dropped as consensus came down from 2010 to 2013. As estimates began to creep upwards so did the stock price. But as estimates started dropping the stock price began to tumble. Now with estimates coming in for negative EPS you’re likely to see the drop continue.

From a technical perspective the stock has recently popped up above the 21 day moving average. Yesterday’s $1.18 jump was good for 5.74%. This does imply the stock may be ready to retrace some of the losses coming down from the highs of early 2014. But looking across the tops of the downtrend it appears that more downside could be around the corner. There have been several spikes to the upside that have been reversed. The last major jump for the stock late last year took shares to nearly $27.

Investors looking for stronger stocks in the Movie/TV Production and Distribution industry can look at News Corp (NASDAQ:NWS). News Corp is a Zacks Rank #2 (Buy).


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