DreamWorks Animation Likely to Book Loss on 'Penguins,' Analyst Says

The Penguins of Madagascar Still - H 2014
Courtesy of DreamWorks Animation

The Penguins of Madagascar Still - H 2014

Another observer says the studio needs strong film results to "regain investor confidence" and "convince potential buyers" as the stock once again drops

DreamWorks Animation is likely to book a loss for Penguins of Madagascar for the fourth quarter after its weaker-than-expected U.S. opening, one analyst said late Sunday, with others also saying there was a risk of a write-down on the film.

Some said the film could still do well amid little competition ahead, with one observer adding that the weaker-than-hoped-for opening could also affect the stock and a possible sale of the studio, led by CEO Jeffrey Katzenberg.

DreamWorks Animation's stock on Friday closed at $23.84 and was down 4.6 percent in early Monday pre-market trading at $22.75 and down 6 percent as of 10:15 a.m. ET.

Stifel, Nicolaus analyst Benjamin Mogil in a research note late Sunday noted that Penguins opened its North American run to a five-day box-office take of $36 million, "well below our estimate and consensus." He added: "International performance to-date has been okay, but we are reducing our global full-run box office estimates for the film and now expect the company to book a loss on the film in the fourth quarter, unless international materially outperforms the current trajectory."

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He now expects the studio to book a loss of $14 million on the film in the fourth quarter. "Even if international was $50 million stronger [than estimated], effectively allowing the film a small margin, we do not see that as sufficient from an expectations' perspective," he said. "We view the headline box-office numbers as a negative data point for investors and we remain "hold" rated," he said. His North American box-office estimate for the five-day weekend had been for $50 million to $55 million.

To date the film has grossed $63 million internationally. About the international trends, he added: "We do not view the international start, particularly as China has already opened, as being sufficient at this trajectory for the film not to incur a loss," adding, "Recall this title has limited consumer products expectations."

The notable foreign markets to open this weekend were Russia ($8 million), Germany ($4 million) and Italy ($4 million), "which had strong openings," the analyst said. "Russia's opening was ahead of that of Frozen, and each of the major markets opened much stronger than Rise of the Guardians: Russia +32 percent, Italy +58 percent and Germany +300 percent." But the analyst concluded: "That said, we believe that our $300 million international box office estimate (down from $393 million), compared to $203 million for Guardians, reflects this stronger trajectory."

He also revised downward his DVD/VOD estimates for the title. "We now expect the title to sell 3.5 million net units (had been 4.7 million) and VOD to generate $11 million of revenue (had been $15 million)," Mogil wrote.

Another weak film opening underscores the serious challenges DreamWorks Animation’s business model is facing. Growing pressure on the film’s top line and elevated costs means every new release is a potential write-down.

Early Monday, Sterne Agee analyst Vasily Karasyov said Penguins was "on track to generate ultimate domestic box office of $105 million, significantly below our and the Street’s expectations prior to the film’s release, which were $200 million and $175 million, respectively."

He stopped short of saying a write-down was ensured, but signaled it was likely: "We estimate that the film will be a write-down if international box office comes in below the level of  about $350 million. Hitting this target will be challenging since it implies 3.3 ratio of overseas-to-domestic gross. The highest ratio for a DreamWorks Animation title in the last five years was Kung Fu Panda 2 at 3.0; this ratio for Puss in Boots, which is a good comparable title, is 2.7."

Janney Montgomery Scott analyst Tony Wible said that Penguins has a "long favorable release window" and was likely to have "a larger than average ultimate-to-open ratio." But he also warned: "The weaker results increase risk of another impairment and continue to dilute the momentum DWA is gaining in its non-film business. We are maintaining our estimates until we get a better sense for how the post-release tail will develop, but we believe [Wall] Street numbers will need to come down."

B. Riley analyst Eric Wold said the box-office trends also could be a negative in attempts to possibly find a buyer for DWA.

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‎"Weak results do not help the studio’s value," he said in a report. "Following write-downs for three of the past five films and numerous rumored and failed sales of the studio, we believe DreamWorks needs to generate strong results for its upcoming film slate in order to 1) regain investor confidence in their ability to create new franchises; and 2) convince potential buyers of the value of DreamWorks’ library and franchises to be monetized through new avenues (i.e. consumer products and licensing opportunities)."

Concluded Wold: "The weak opening for Penguins does not help that formula."

He said the U.S. opening "could put our already low box-office projection at risk if the film does not pick up steam during the holiday season. But he also expressed hope, writing: "With no new animated competition on the calendar until January (and only Big Hero 6 still in theaters to draw away movie-goers), there is a chance for the film to pick up steam in the coming weeks as families look for holiday options."

How high could the box office go? "Based on DreamWorks’ average opening weekend-to-total domestic box-office ratio of 3.8x over the past five years, Penguins would be on track for only $99 million domestically versus our $140 million projection," said Wold. "However, we continue to believe a solid comparison is the other recent DreamWorks franchise spinoff, Puss in Boots (a spinoff of Shrek), which opened to $34.1 million in Oct. 2011 and went on to generate $149.3 million domestically."

Wold maintained his "neutral" rating on the stock and his price target of $25.

DreamWorks Animation has seen several losses on movies that haven't generated the hoped-for box-office results. The company took an additional charge of $2.1 million for Turbo and also previously had a loss for Mr. Peabody & Sherman.

Morgan Stanley analyst Benjamin Swinburne was more bullish than others in a report with the headline: "Penguins Off to a Slow Start, But Likely Still Profitable." "Holding our assumed 2.6 international-to-domestic box-office ratio and bumping up our DVD tie ratio (to reflect the fact that lower-domestic-box titles tend to have higher tie ratios), we project Penguins will generate $20 million-$25 million of gross profit in its 10-year ultimate," he wrote. "The international box is the most significant swing-factor for Penguins’ profitability, in our view, and the Madagascar franchise has typically played well overseas."

Dec. 1, 7:15 a.m. Updated with latest stock price.

Email: Georg.Szalai@THR.com
Twitter: @georgszalai