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Analyst Upgrades DreamWorks Animation from 'Sell' on Fox Deal, 'Guardians'

Rise of the Guardians Film Still - H 2012

Janney's Tony Wible now has a "neutral" rating on the studio's stock and predicts an "earnings inflection point" in 2013, citing those factors, a broader film slate and a possible TV network.

Janney Montgomery Scott analyst Tony Wible on Thursday upgraded the stock of DreamWorks Animation from "sell" to "neutral," citing upcoming release Rise of the Guardians and a new film distribution deal with News Corp.'s Fox.

He also raised his fair value estimate on the stock to from $14.50 to $19. And DWA will see its stock multiple expand going into the launch of Guardians if tracking data improves, Wible wrote in a report.

Although the company still faces "headwinds tied to merchandise sales, franchise fatigue, lower DVD sales" and currency exchange rates, the analyst said he sees "an earnings inflection point" in 2013.

"We see it benefiting from a broader film slate, negative cost savings, domestic TV fee savings, a possible TV network and the strategic benefits tied to the News Corp. relationship, the acquisition of Classic Media and the Oriental DreamWorks  partnership," Wible said. "It may also be poised to deliver a hit film with The Guardians....Initial interest in The Guardians could set it up for a much-needed hit."

The new distribution deal with Fox in particular should allow DWA "to eliminate fees it pays in the U.S. TV market, which implies that its new deal with Netflix will be exempt from the historical 8 percent fee," said Wible. "Furthermore, News Corp. could look to partner with DWA to launch a TV network, which DWA can program through its Classic Media portfolio and its current catalog of intellectual property."

While this will not contribute to revenue quickly, "it would help sustain the aforementioned inflection point in earnings," Wible argued.

Email: Georg.Szalai@thr.com

Twitter: @georgszalai