Is Stability a Pipe Dream for Dreamworks Animation Skg Inc (DWA)?

In 2013, DreamWorks originally planned to take a risk and release three original titles: The Croods, Turbo and Mr. Peabody and Sherman — which are not connected to any of its existing high-grossing franchises. However, it recently announced that it would delay Mr. Peabody and Sherman — which is about a time-traveling boy genius and his dog — by four months, releasing only two films in 2013, and pushing back the film’s potential profits into 2014. This single delay prompted several downgrades from analysts.

In 2014, it plans to release another original title, Me and My Shadow, as well as sequels to How to Train Your Dragon and The Penguins of Madagascar.

Recent reports that DreamWorks intends to layoff 500 employees exacerbated concerns. The cuts are expected to reduce the studio’s production, technology and overhead departments, according to The Hollywood Reporter.

The delayed releases and staff reductions all point to future problems in earnings and revenue growth.

Expansion and Opportunities

Looking forward, DreamWorks is keen on pursuing other sources of revenue outside of its core studio segment.

DreamWorks recently acquired Classic Media, a holdings company that owns classic cartoon characters such as He-Man, Gumby, Felix the Cat and Casper the Ghost. This $158 million acquisition considerably strengthens DreamWorks’ existing stable of characters, giving it a lot more intellectual properties to experiment with in feature films and other properties.

DreamWorks is expanding into China as well, through a media joint venture, “Oriental DreamWorks.” The studio intends to use this partnership as a platform to introduce more of its characters into China, and to open a theme park in Shanghai in 2016 to complement and compete with Disney’s upcoming Shanghai Disneyland.

The company plans to open its first domestic theme park in New Jersey in 2014. It will be the first amusement park to exclusively feature DreamWorks characters.

Bottom Line

DreamWorks is not a stable investment by any means. On one hand, the company’s attempts to diversify into new business segments and take chances on new intellectual properties is encouraging. On the other hand, the company’s business model is still extremely top heavy and completely dependent on its next box office hit.

Investors should also be aware that DreamWorks only has $130.71 million in cash, but is shouldering $200 million in debt. That makes future expansions — especially theme parks — a very risky venture.

I would advise investors to take a “wait and see” approach with DreamWorks — if the company can truly meet its own goal of releasing three quality films annually, as well as introduce new sources of revenue, then it could steadily evolve into a diversified giant. Otherwise, it’s just a very volatile cartoon stock.

The article Is Stability a Pipe Dream for DreamWorks Animation? originally appeared on Fool.com and is written by Leo Sun.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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