DWA Market Research & Analysis Report
Updated Sep 12, 2014

Growth and Balance Sheet

The company reported net loss of $15.4 million, or 18 cents diluted loss per share, for the second quarter of 2014 ending June 30. That's down from a net income of $22.3 million, or 26 cents diluted earnings per share for the same quarter last year. Revenues for the second quarter were $122.3 million, down from $213.4 million for the same quarter last year. The feature film segment contributed revenue of $69.7 million and gross profit of $23.9 million to the second quarter. How to Train Your Dragon 2, released on June 13 has grossed $428 million as of the end of the quarter and is the 9th highest grossing film of the year up to June 30.  On Labor Day the movie crossed the $600 million mark and become the highest grossing animated film of the year. The Television segment contributed revenue of $20.0 million and gross profit of $1.2 million, primarily due to Turbo F.A.S.T. on Netflix, Classic Media content and DreamWorks Dragons: Riders of Berk on Cartoon Network. The segment consisting of all other items contributed revenue of $14.1 million and gross profit of $2.3 million to the second quarter, primarily due to AwesomenessTV. Gross profit margin for the quarter was 28.41%, in comparison to 37.56%. Operating profit margin for the second quarter of 2014 was -8.93%, in comparison to 15.10% for the same quarter last year. Cash flow used in operating activities for the first six months of 2014 was $66.4 million, in comparison to cash flow provided by operating activities of $19.7 million for the same period last year. Cash and cash equivalents as of June 30, 2014 were $32.2 million in comparison to $95.5 million as of December 31, 2013. DWA forecasted third quarter of 2014 EPS are in the range of -15 cents to 12 cents, compared to actual EPS of 12 cents for the third quarter of 2013. The financial strength indicators of the company are at satisfactoy levels. Company’s current ratio is 2.61, and the industry average is 1.86. Also, the quick ratio of 0.73 is better than the industry average of 0.44. In terms of efficiency, the asset turnover ratio of 0.29 is standing better than the industry average of 0.12; and the ROE of -2.28% is lagging behind the industry average of 1.76%. 

Valuation

DWA PE is negative due to negative earnings in the twelve trailing months. Over the last five years, the company’s shares have traded in the range of 9.39x to 403.47x trailing 12-month earnings. DWA's current Price/Sales of 2.99 is below the average of its industry of 1.49. DWA’s head to head comparison to its main competitors shows that the company has second lowest gross margin in comparison to the selected peers, and one that is below the industry average. The achieved twelve trailing months operating margin is negative and the worst result in comparison to the achieved margins of the selected peers, and below the industry average operating margin. The quarterly revenue growth of the company is negative and the worst result in comparison to the selected competitors. The P/S ratio is lower than DIS, but higher than LGF. DWA’s twelve trailing months EBITDA is -$10.60 million, below the industry average of $54.96 million. The stock is currently trading above its intrinsic value of $18.57, this suggests that the stock is currently overvalued at these levels. The beta of 0.65 implies lower volatility of the stock with respect to the S&P 500. DWA has not shown favorable earnings consistency over the last five years. Moreover, its earnings have decreased by 16.24% over the last five years. The current quarter earnings in comparison to the same quarter last year have decreased by 169.13%. DWA’s Total Debt/Equity of 29.35 is above the required maximum, but it is below the industry average of 155.90. DWA’s current price levels are above the maximum level, 36.91% below the 52 week high of $36.01, and the technical analysis give neutral view of the stock. DWA currently does not pay any dividends. 

About DWA

DreamWorks Animation SKG, Inc. (DreamWorks Animation) is engaged in the development, production and exploitation of animated films and their associated characters in the worldwide theatrical, home entertainment, television, merchandising and licensing and other markets. DreamWorks Animation creates family entertainment, including animated feature films, television specials and series, live entertainment properties and related consumer products, meant for audiences around the world. As of December 31, 2012, it had released a total of 25 animated feature films. The Company’s films are distributed in theatrical, home entertainment and television markets on a worldwide basis by Paramount Pictures Corporation, a subsidiary of Viacom Inc. (Viacom), and its affiliates (collectively, Paramount). On August 29, 2012, it completed the acquisition of Classic Media (which now operates as DreamWorks Classics).

Competitor Comparison

DreamWorks Animation SKG Inc. (NasdaqGS: DWA) N.V.

Highlights

DreamWorks Animation SKG, Inc. is engaged in the development, production, and exploitation of animated films and their associated characters worldwide. The stock closed yesterday’s trading session at $22.72. In the past year, the stock has hit a 52-week low of $19.20 and 52-week high of $36.01. The intrinsic value of the stock is below the current price. DWA has a market cap of $1.92 billion and is part of the Services sector.

• Strong partnerships to reduce dependence on film-base revenue     
• Distribution agreement with Twentieth Century Fox 
• Geographic expansion  

• Concentrated business operations  

DWA Intrinsic Value

Stock Valuation Model & Intrinsic Value Definitions

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. DWA's 52 week high is $36.01, current price is $22.72, is 36.91% below the 52 week high.

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature.  The company has a P/E ratio of 54.97 the average industry P/E ratio is 24.50 and is below the S&P 500 P/E ratio of 18.97.

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.  Insiders own 13.91% of DWA stock. Management's representation is large enough. This does satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

DWA is trading in the range of $19.87 - $23.37 in the past 30 days. The stock has been showing support around the level of $20 and resistance in the $23 range. The stock is trading above the 50-Day Moving Average but below the 200-Day Moving Average. The RSI(14) is 59.72. As can be seen from the chart on page 1, since the beginning of 2014 the stock has been continuously plummeting down. Towards the end of July the stock gapped down to the psychological level of $20 where it found support. Since then the stock has rebounded, closed the gap, but has been unable to go above the resistance level at around $23.50. The stock is currently at the higher end of a downward sloping trading channel. If the stock is able to go above the upper boundary, it would be considered as a good bullish sign. Our indicators give a neutral view of DWA.

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Investor’s sentiment for the stock.

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com is 1 Buy, 8 Hold, and 3 Underperform.

We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. DWA’s annual EPS for the last 5 years were 1.73, 1.96, 1.02, -0.43, and 0.65 this type of earnings action is not favorable.

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry. DWA’s Total Debt/Equity of 29.35 is above the required maximum, but it is below the industry average of 155.9.

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. DWA’s EPS growth for this quarter relative to the same quarter a year earlier is -169.13%, below our target.

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. DWA’s annual earnings growth rate over the past five years is -16.24%, below our target.

¹Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.