Has DreamWorks Animation Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if DreamWorks Animation (Nasdaq: DWA  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at DreamWorks Animation.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 3.3% Fail
  1-Year Revenue Growth > 12% (14.2%) Fail
Margins Gross Margin > 35% 29.5% Fail
  Net Margin > 15% 9.7% Fail
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 3.29 Pass
Opportunities Return on Equity > 15% 4.9% Fail
Valuation Normalized P/E < 20 24.47 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   2 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at DreamWorks Animation last year, the company has lost three full points. The stock has also given shareholders a less than entertaining ride, dropping about 15% over the past year.

Like its movie-producing rivals, DreamWorks lives and dies based on the successes and failures of its blockbusters. This summer, Madagascar 3 has been a big hit for the studio, with more than $1.7 billion in box office receipts worldwide.

Yet increasingly, DreamWorks has realized that it needs to go beyond the big screen in order to thrive. Last year, it signed a streaming video deal with Netflix (Nasdaq: NFLX  ) to provide content through 2018. It also decided to switch distributors, moving away from Viacom's Paramount in favor of News Corp.'s Fox. The move will save it money on digital distribution and TV and cable releases.

DreamWorks is also jumping on the bandwagon toward getting more exposure in China, responding to Disney's (NYSE: DIS  ) planned theme park in Shanghai. But DreamWorks is actually creating an animation studio in China as part of a larger entertainment complex in which DreamWorks will retain a 45% interest alongside a Chinese consortium. The entertainment district will include the world's biggest IMAX (NYSE: IMAX  ) theater. The move follows up on DreamWorks' deal with Youku.com (NYSE: YOKU  ) to distribute the Kung Fu Panda series online last year.

For DreamWorks to improve, it needs to keep making these creative strategic moves in an attempt to bolster its sales. With content at a premium, though, DreamWorks looks poised to boost its score in the years ahead.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

DreamWorks may be looking to Netflix for success, but for its part, Netflix has had its ups and downs -- with lots of downs. Find out whether the streaming giant is a value play or a value trap by looking at the Fool's premium report on Netflix. Our top analysts scour the financials inside and out to identify the company's pros and cons, so don't wait another minute -- read it today.

Click here to add DreamWorks Animation to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Disney, Netflix, and IMAX. Motley Fool newsletter services have recommended buying shares of Netflix, DreamWorks Animation, IMAX, and Disney. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 05, 2012, at 9:49 PM, wjcoffman wrote:

    I should've listened to my mother in law all those years ago. Companies that make movies are for entertainment not investing. She bought shares of something that Prudential was pushing back then. As a shareholder you were entitled to see some number of movies for free. My investment in DWA is a dismal failure at best. Bought shares 2x in 2010 at 39 and 31 per stub. That investment is off 50% after 2 yrs, 75% compared to the S&P. Dead money. Other than NFLX that's easily my worst investment. Hmm, NFLX is in the movie pushing business. Wonder if I'm on to something.

    DISCLOSURE: I really just like to be the 1st one to comment on articles.

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