Dreamworks Results Not Dreamy
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On Tuesday the Dow closed at its highest level in nearly four years, but it seems that someone forgot to tell DreamWorks Animation (NASDAQ: DWA). Shares in the niche movie studio fell almost 10% in after-hours trading after the company announced its 4Q and full-year 2011 results. For the latter, revenues totaled $706 million while net came in at $87 million. Those numbers were down 10% and nearly 50%, respectively, on a year-over-year basis, and the quarterly falls in both metrics were even steeper. The company’s guidance didn’t soothe that burn; in a conference call, its CFO said fiscal 2012’s non-movie revenue – which typically constitutes 35%-40% of the company’s total -- would be lower still. No wonder the stock traded down.
As a narrowly focused company, DWA needs to find revenue streams outside of feature film box office take. It’s largely been successful at doing this; again, 35%-40% of its annual take is derived largely from “ancillary” (i.e., non-theatrical) markets, such as DVD/Blu-ray sales and television licensing rights for its films. The problem with that is, home media sales and rentals have been dropping consistently since 2007 and they’ll continue to slide. According to the Digital Entertainment Group, DVD sales (which were far and away the bulk of the market) dropped 20% year on year in 2011 to just under $7 billion. This was somewhat offset by a 19% hop in Blu-ray discs (19% to over 2 billion) and, particularly, digital offerings like streaming. This category saw a leap of 50% to $3.4 billion. But those increases couldn’t lift the overall market for sales, which all told slid 12% to $9.5 billion during the year. As DVD is becoming a rapidly obsolete format, it’s a given that those key numbers will continue to tumble.
Although the company does excellent business with its theatrical releases, its potential in that sphere is limited. This is because, as an animation studio, it needs lots of time and manpower to make its movies. In 2010, for example, the company released a grand total of three films… and for DWA, that was a crowded schedule. Last year was more typical with two releases; the lower number was also a significant factor in the year-on-year revenue and profit decline. Contrast this output with that of the company’s distributor Paramount Pictures, a unit of Viacom (NASDAQ: VIA). DreamWorks Animation’s two movies barely made a dent in Paramount’s release schedule, which totaled 17 films last year. True, Paramount dwarfs a specialty house like DWA but even a more comparably-sized “mini-major” studio concentrating on live action films like Lions Gate Entertainment (NYSE: LGF) is more prolific – it had 13 movies in release in 2011.
For 2012, DWA will put out, again, a pair of films. One is the latest in a franchise series (Madagascar 3) and one’s an original (the modern-day fairy tale Rise of the Guardians). Both will likely do well. But theatrical is only part of the equation, and by its own admission the company’s other revenue will fall short. Meanwhile, its valuation is still rich compared to its much more prolific and diversified peers. For example, against the entertainment and merchandising juggernaut that is Walt Disney (NYSE: DIS), it trades at a trailing P/E of around 17.5 vs. The Mouse’s level of just under 16. Meanwhile, Disney has leading animation studio Pixar under its wing and a set of robust business units that feed each other’s growth. Oh, and there’s a dividend too (60 cents per share at the moment), which doesn’t seem like something DWA will be offering any time soon.
DreamWorks Animation makes good, funny movies. If the stock performed as well as those films, it would definitely be a key entertainment industry selection for many portfolios. But it doesn’t and it probably won’t, so it’s likely to continue being passed over in favor of its bigger, more diversified and better growing peers.
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