DreamWorks Animation Stock Hits 52-Week Low, Analysts Raise Liquidity Concerns

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One downgrades the stock to "sell," citing "higher risk and little growth from film until 2017," while another one wonders if the company could be insolvent by 2019.

DreamWorks Animation's stock dropped in pre-market trading on Friday after its announcements of layoffs and a smaller release slate late Thursday. Analysts focused much attention on pondering the question whether the company will have enough cash to continue operating, especially if it has to take more write-downs on films that underperform.

As of 9:35 a.m. ET on Friday, the stock was down 10.8 percent at $19 after going as low as $18.51, below its previous 52-week low of $19.20 set at the end of July. It had closed at $21.31 on Thursday.

Janney Montgomery Scott analyst Tony Wible on Friday downgraded his rating on the stock to "sell." In a report entitled "Delaying the Dream Again," he wrote: "DWA's latest restructuring will stress earnings and introduce another layer of uncertainty as it is laying off 18 percent of its workforce, pushing out projects and taking $290 million of write-downs as it struggles with the lack of hits/profits in the film division."

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He added: "The situation undermines growth for two years and will start to spark liquidity concerns that hurt equity value. We are downgrading from "neutral" to "sell" as we see higher risk and little growth from film until 2017."

But he said deal talk could support the stock. Wrote Wible: "DWA is still an attractive M&A candidate for a foreign buyer." Japan's SoftBank and toy giant Hasbro held talks with the studio about a potential deal last year.

Cowen analyst Doug Creutz on Friday also downgraded his stock rating on DWA, in his case to "underperform." "While this may be the best choice given the circumstances, we do not believe the changes are likely to arrest the decline in DWA's fundamentals," he wrote about the restructuring.

Addressing the company's liquidity, he said: "With $500 million in debt and $50 million in cash on the balance sheet, upcoming
restructuring cash costs of $110 million, and Home slated as the only film in 2015 (March 27), we think DWA is in a precarious financial position."

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BTIG analyst Rich Greenfield on Friday issued a particularly somber note entitled "Could DreamWorks Animation Be Insolvent By 2019?"

"With half of DWA’s revolver [credit line] drawn, an inability to generate sustained annual profits, meaningful risk that current revenue generating deals with Netflix may not be renewed or will be renewed at significantly reduced levels and their distribution deal with Fox costs more in the future or disappears, it is hard to have confidence in DWA’s liquidity situation beyond 2018," he said. "While a new hit franchise can solve DWA’s problems quickly, DreamWorks’ batting average has been exceedingly poor over the past decade since their IPO."

Greenfield also argued that the company "significantly overextended" itself and that is has "failed to create great content/sustainable franchises." He concluded: "While they have sufficient liquidity in the next couple of years, barring every single film being a financial disaster, they are skating on increasingly thin ice."

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He suggested that the restructuring was not only due to "the creative challenges facing the films, but the liquidity problems more failures in 2015 would have created."

Concluded Greenfield: "Despite the fact that DreamWorks Animation appears wholly incapable of sustainably generating a profit, the stock trades at over $21 per share yielding a nearly $2 billion market cap. Investors keep hoping someone will buy the company or that they get that elusive “blockbuster” franchise that never comes. Now, after frantically trying to sell themselves for north of $30 per share and everyone passing (because they understood just how overvalued DWA was), the company was left with no choice but to drastically reduce its cost structure to stay afloat."

Stifel, Nicolaus analyst Benjamin Mogil has a "hold" rating on DWA's stock and was less concerned about the company's cash position. He wrote in a report: "DreamWorks Animation announced a far-reaching restructuring program after-market, which reduced the company's slate ambitions materially. While an investor focus on near-term liquidity concerns is not one which we share right now, we do view earnings [as] continuing to be volatile given the reduced slate."

And B. Riley analyst Eric Wold, who has a "neutral" rating and $25 price target on DWA's stock, on Friday cut his financial forecasts for 2014, 2015 and 2016 and called any investment in the firm "dead money for [the] next 12-18 months."

He wrote: "With only one film being released this year (and we remain concerned about Home) and then 12 months before the next film in 2016 (Kung Fu Panda 3), we do not see any reason for investors to get involved given continued uncertainty around the upcoming slate. Furthermore, we believe any considerations to acquire the studio would also be on hold given the diminished value of the library and need to gain confidence in upcoming slate potential."

Jan. 23, 5:25 a.m. Updated with latest pre-market stock price and further analyst commentary.

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