This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines feature a pair of biotech upgrades for Gilead Sciences, Inc. (NASDAQ:GILD) and Celgene Corporation (NASDAQ:CELG). But the news isn’t all good, so before we get to those, let’s find out first why one …
Critic pans DreamWorks Animation Skg Inc (NASDAQ:DWA)
As a general rule, analysts on Wall Street don’t downgrade stocks to anything sounding like “sell” unless given basically no choice. Because why upset a potential client you might want to woo for stock and bond business, right? So it was pretty surprising to see this morning that not only is ace analyst Sterne Agee recommending selling DreamWorks Animation Skg Inc (NASDAQ:DWA) — but it’s doing this sua sponte, initiating coverage of a stock it didn’t even have to cover, and warning folks it is going to underperform the market.
Why? According to Sterne, it’s really pretty simple: “The Street is likely assuming that future film releases will perform as well as The Croods, DreamWorks Animation Skg Inc (NASDAQ:DWA)’s most recent title.” Investors are pricing this assumption into the stock, but Sterne doesn’t believe it’s a given, and sees every likelihood that earnings will fall 35% at DreamWorks in the coming year.
Sterne comes to this conclusion based on “a run-rate estimate of domestic box office of $160 million and international box office of $280 million for an average original title” coming out of DreamWorks. In the case of the company’s next title, Turbo, to be released next month, that works out to about 12% less revenue than everyone else on Wall Street is expecting.
So is Sterne right, and everyone else is wrong? I don’t know. What I do know is that an unprofitable company that usually burns cash and generated all of $27 million in free cash flow over the past year is not worth the $1.9 billion price tag that’s currently being hung on it. DreamWorks isn’t worth 70 times FCF, full stop. For me, that’s more than enough reason to sell the stock.
Turning now to happier news, shareholders of two biotech companies — Gilead Sciences, Inc. (NASDAQ:GILD) and Celgene Corporation (NASDAQ:CELG) — received upgrades from the analysts at Argus Research this morning. Let’s take them one at a time.