DWA game over# Stock
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DreamWorks Animation (DWA) fell 4.2% today after Barclays analyst Anthony
DiClemente initiated coverage of the company at Underweight on concerns
about DVD sales, a higher risk profile, and the diminishing popularity of 3-
D movies.
“Though long a concern for DWA, declining DVD sales continue to cut into
film profits. While digital revenues are widely viewed as a potential
replacement for lost DVD sales, we believe that the streaming rights to most
DWA content in the pay TV window are locked up in a deal with HBO that
lasts until 2014, limiting DWA’s near-term ability to further monetize its
library content through broadband distributors,” DiClemente writes.
Also, because DreamWorks releases only two or three films a year, its
earnings can be very volatile.
“We estimate each DWA film costs $130M to produce, roughly double the cost
of an average Hollywood film. The sizeable investment in each film adds risk
to the model and raises the required return for DWA shares, ultimately
discounting the company’s long-term value and lowering the multiple
investors should pay, in our view.”
DiClemente initiated coverage of the company at Underweight on concerns
about DVD sales, a higher risk profile, and the diminishing popularity of 3-
D movies.
“Though long a concern for DWA, declining DVD sales continue to cut into
film profits. While digital revenues are widely viewed as a potential
replacement for lost DVD sales, we believe that the streaming rights to most
DWA content in the pay TV window are locked up in a deal with HBO that
lasts until 2014, limiting DWA’s near-term ability to further monetize its
library content through broadband distributors,” DiClemente writes.
Also, because DreamWorks releases only two or three films a year, its
earnings can be very volatile.
“We estimate each DWA film costs $130M to produce, roughly double the cost
of an average Hollywood film. The sizeable investment in each film adds risk
to the model and raises the required return for DWA shares, ultimately
discounting the company’s long-term value and lowering the multiple
investors should pay, in our view.”