At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
Everything old is new again
It's been a year -- almost to the day -- since I first began warning investors that DreamWorks Animation
Over the next four months, DreamWorks' stock rose nearly 30%, as ogre-adorers gambled that DreamWorks would soon get snapped up by an acquirer, as Pixar did by Disney
As hopes for a DreamWorks buyout faded, so did its stock price. Today, DreamWorks stock is right back down to selling as cheaply as it did when I called the bottom last year. So obviously, now must be a great time to ... sell DreamWorks?
I'm not saying DreamWorks is a "sell" today. The smart stock pickers at Stifel Nicolaus are -- even though their upgrade of the stock prompted my reassessment back in June.
Arguing that analysts have correctly pegged expectations for the upcoming Megamind DVD release, and that there seem to be no other "near-term catalysts" to help out DreamWorks, the formerly bullish analysts at Stifel argue that there's little prospect for a revival in stock price today. Thus, Stifel thinks investors ought to sell and walk away. Judging from Stifel's record in media stocks, that just might be advice you want to take.
Let's go to the tape
While it may be a middling picker of media stocks overall, Stifel has been on a bit of a winning streak of late. A small majority of its industry picks are now beating the market, including such recommendations as:
Stifel's Picks Beating S&P By:
Given its record of success, if you choose today to follow Stifel's advice and sell your DreamWorks stock, I wouldn't blame you a bit -- but I will disagree with you.
DreamWorks reports Q4 earnings next Thursday. Considering its knowledge of the industry, I suspect Stifel correctly predicts that we'll find no pleasant surprises in that report. Short-term catalysts seem lacking in the extreme.
But when investing in the stock market, particularly in the film business, short-term thinking is the wrong way to go. There are plenty of reasons to shun DreamWorks today, including paltry free cash flow and feeble 8.25% annual growth expectations over the next five years.
Cue "happily ever after"
But consider the longer-term picture: Over the past five years, DreamWorks has averaged free cash flow of $174 million (nearly 40% ahead of reported "net profit"), which gives the stock a price-to-free cash flow ratio of about 13.5. Admittedly, if DreamWorks is only able to grow that cash haul 8% per year over the next half-decade, that's probably not a good price to pay for the stock. But most analysts who follow the industry agree that film producers overall will growing at better than 15% over the next five years.
Maybe DreamWorks is no Pixar, but it does still have Jeffrey Katzenberg at the helm. It did create Shrek once upon a time. How likely is it that DreamWorks Animation is only half as good a filmmaker as the average company in this industry? That it'll only grow half as fast?
Stifel Nicolaus seems to believe that these negative forecasts are all too likely to materialize. But I look at what DreamWorks has accomplished in the past, including the back-to-back "earnings beats" it posted last year, and the resources it still has to help script its future, and conclude that there's still a chance DreamWorks will give us a pleasant surprise.
Maybe not as soon as Thursday. But soon enough.
Fool contributor Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 654 out of more than 170,000 members. The Motley Fool has a disclosure policy.
Walt Disney and DreamWorks Animation SKG are Motley Fool Stock Advisor recommendations.
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