Why DreamWorks Is a Dead End

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Why DreamWorks Is a Dead End

By Richard Robinson, Ph.D., Financial Analyst

Monday’s stock market session saw red across the three major indices. But one company in particular was able to buck the trend . . .

DreamWorks Animation (DWA) surged more than 26.3% on Monday amidst acquisition rumors by the Japanese conglomerate SoftBank (SFTBF).

Rumors on Wall Street are hinting at a SoftBank offer of $32 a share, making the potential acquisition worth about $3.4 billion.

That would represent a premium of 43.1% to last Friday’s closing price of $22.36.

So does this sudden surge in price represent a compelling buying opportunity, or a good time to bail on the stock?

Breaking Down the Acquisition Offer

DreamWorks is engaged in the development and production of animated films and their associated characters worldwide. The company is known for such franchises as Shrek, Kung Fu Panda, and Madagascar.

Now, shares have declined more than 19.8% year to date. So it wasn’t surprising that the sudden uptick in price was the talk of Wall Street analysts.

More than 19.5 million shares of the California-based company traded hands in Monday’s session, compared to a typical trading volume of about 1.5 million.

And while the deal may sound intriguing for investors, SoftBank just doesn’t bring any synergies to the table that would help DreamWorks turn things around.

Put another way, the acquisition has very little real chance of being consummated.

But even if the deal goes through, the stock is already very close to the reported takeover price – which means the potential reward doesn’t justify the risk of owning the stock at these levels.

Besides, a fundamental examination of the stock on an individual basis shows that investors should run, not walk, from this dog.

A Nightmare in the Making

You see, even a cursory look at DreamWorks’ 10-Q for the period ending June 30 shows some very disturbing trends . . .

DreamWorks reported a Q2 2014 revenue of $122.2 million, which is a decrease of 42.7% against the company’s Q2 2013 revenue of $213.4 million.

Additionally, the company reported more than $348 million in total revenue through the first half of 2013, compared to just $269.5 million for the first six months in 2014 – a difference of 22.5% year over year.

Clearly, DreamWorks’ revenue trend is heading in the wrong direction. Unfortunately, the same can be said of its net income, as well . . .

According to its financial reports, DreamWorks reported a Q2 2014 net loss of $15.9 million, which represents a 171.6% decline over the company’s second-quarter profit of $22.2 million in 2013.

It was the same for the first half of 2014, too. DWA reported a H1 2014 net loss of $58.3 million; compared to a H1 2013 net profit of $28.3 million – a negative change of more than 300%!

While it’s true that revenue and income results have been hard hit by several recent disappointing film releases, the fact of the matter is that DreamWorks doesn’t have anything in the pipeline that portends a return to profitability anytime soon.

And this has shown in the stock performance, which, until Monday, showed a decline of 36.3% on a year-to-date basis.

Because no firm commitment from SoftBank to acquire DreamWorks exists, we continue to maintain a price target for DWA at $20 per share.

Buying DreamWorks’ stock based on an ethereal deal from SoftBank is nothing more than a nightmare in the making. Avoid the stock if you don’t own it, and take your money and run if you do!

Good investing,

Richard Robinson

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By Richard Robinson