Commentary: Stuck in 'neutral,' DWA looks to shift analyst opinions with earnings report

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Are you a DreamWorks Animation bull, or, at least in the short term, a bear? Most analysts are lukewarm --  or "neutral," in Wall Street speak -- on shares.

After all, boxoffice results for "Monsters vs. Aliens," the company's sole 2009 theatrical release, have been weaker than expected, making it a longer process for the studio to recoup costs on the film. Plus, after a runup since early March along with the broader sector and overall market, DWA shares are up year-to-date. Based on analysts' 2009 and 2010 earnings estimates and recent stock prices, DWA already is valued in line with or at a premium to the big entertainment conglomerates.

As a result, many predict renewed opportunities for DWA stock gains only in case of major declines or once a stronger 2010 kicks off.

Nonetheless, Goldman Sachs analyst Ingrid Chung acknowledges she is a DWA bull, even amid the current situation. She expects upside will develop during the coming months, citing possible catalysts that could begin playing out during the fourth quarter. That is why she, unlike her peers, reiterated a "buy" rating on the company in a recent report and called DWA shares "undervalued."

Because timing is everything, it will be interesting to see whether today's second-quarter earnings report and related management call will change the views of other Wall Street folks and draw anyone else to the bullish side eight months before the firm's next theatrical release.

Chung mentions four possible catalysts for DWA shares by year's end:

-- 1. Merchandising, advertising and DVD revenue from TV specials airing during the fourth quarter;

-- 2. Anticipation for three theatrical films, including "Shrek Forever After," in 2010;

-- 3. A possible renegotiation of DWA's distribution agreement with Paramount before it expires at the end of next year; and

-- 4. "Possible strategic value to a major studio without CGI capabilities," as evidenced by recent market chatter that Time Warner might be eyeing a bid for DWA.

"In addition, we note that 'Shrek the Musical' is becoming more profitable as we enter the summer holiday season, with improvements in both ticket prices and attendance," Chung wrote recently in raising her six-month price target by $2, to $36.

To most on Wall Street, however, DWA shares remain a show-me story.

Wedbush Morgan analyst Michael Pachter lowered his second-quarter estimates ahead of today's earnings report, "to reflect soft international boxoffice for 'Monsters vs. Aliens.' " He estimates that the film's international boxoffice might total $175 million, below his previous $205 million-$210 million estimate.

Pachter says, "Our long-term (outlook) remains constructive, but near-term catalysts appear limited." No surprise, then, that he rates the stock "neutral," with a $29 price target.

"We would become more constructive on the shares on any meaningful pullback," he added, predicting, though, that DWA shares will remain rangebound during the next few months.

Like Pachter, UBS analyst Michael Morris recently lowered his second-quarter estimates, arguing that "Monsters" "has not likely recouped its marketing costs." He, too, has a "neutral" rating on the stock and a $28 target.

"Let the waiting begin," he writes in his report. "We believe that investor interest in the shares will (only) increase as we get closer to 2010."

But Morris sees DWA's "new opportunities in focus" this earnings season -- an appetizer for stock-price upside to come. That's why he has raised his 2010 earnings-per-share estimate "to reflect structural changes in DreamWorks' film model ... which could boost the profitability of releases starting in 2010," he said.

CEO Jeffrey Katzenberg recently discussed ways in which DWA is looking to grow revenue -- including a 25% larger slate and new TV specials and series -- while lowering production and distribution costs, Morris highlights. He expects more details and color during today's management call.

Caris & Co. analyst David Miller, who carries a $24 price target and an "average" rating, also has been holding out for an upside.

"We remain big fans of the management team at DWA but believe the shares will remain stuck in a tight range until there is a little more visibility on 'How to Train Your Dragon,' slated for a March 2010 release," he said in a recent report.

Even the more bearish observers seem to agree that shares of DWA are poised for a move to the upside sooner or later. It will be up to investors and analysts to get the timing right.
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