DreamWorks Animation (NASDAQ:DWA) has a resume of over 30 feature films, a few of which spawned hit franchises like "Shrek," "Kung Fu Panda," and "How to Train Your Dragon."
But the studio is suffering through a major struggle right now. Since 2012, it has taken an expensive writedown on at least one film each year. "Rise of the Guardians" did the damage three years ago, "Turbo" hurt results in 2013, and "Mr. Peabody & Sherman" whacked earnings last year -- nearly $160 million of writedowns for the three films. We'll find out whether investors can add "Penguins of Madagascar" to that list when the company reports results for its fiscal fourth quarter in a few weeks.
The low batting average for box office hits has crushed DreamWorks' stock, sending it more than 30% lower in 2014 and down nearly 50% in the past five years.
Can shares bounce back in 2015? The odds are against a quick rebound, in my view. But here are two critical things that need to happen for DreamWorks to start turning the corner.
Watch the TV results
The DreamWorks management team has been talking about evolving the company into a "diversified entertainment giant" for years. Diversification is an important goal for any company. But it's even more critical here, when any one of DreamWorks' three annual movie releases has the potential to tank, bringing the entire year's financial results down with it.
The problem is that the company's other major business lines -- consumer products and television -- haven't stepped up their production. Last quarter, feature film revenue accounted for the same huge proportion of sales as it did a year ago, almost 80%.
DreamWorks needs to make real progress toward diversification if the company wants to deliver steady sales and profit growth. And the best chance of that happening is in the TV segment, where deals with streaming giant Netflix for hundreds of hours of content could help boost sales in the division to as much as $200 million in 2015.
Keep cutting costs
Spending on film production also has to come down, a lot. Unfortunately, that's another goal management has been working on for a while -- without much success.
The target has always been to get per-film budgets down from the $145 million total that made "Rise of the Guardians" such an expensive flop to a more reasonable $125 million. While CEO Jeffrey Katzenburg recently called this number a "key focus" for management, investors haven't seen the fruits of that labor. "Mr. Peabody & Sherman" cost approximately $140 million to produce and the last two films, including "Home" which is set for release in March, have cost around $135 million.
Once the costs do come down to targeted levels, however, release weekends should be less nerve-wracking for DreamWorks investors. Their fiscal year won't depend quite so much on just a few weeks of box office results.
The 2015 outlook
The good news is that DreamWorks controls a huge content library stuffed with valuable intellectual property. That's one reason a toy giant like Hasbro has shown interest in acquiring the movie maker. Any piece of that library has the potential to spawn the next "Shrek"-level franchise.
But investors can't bank on an acquisition saving the stock. And with just two films slated for release, it's unlikely a new breakout hit will boost DreamWorks' results in 2015. Instead, the difficult but important progress on film costs and on growing new business lines will be key to setting the company up for stronger, steadier results over the next few years.
Demitrios Kalogeropoulos owns shares of Hasbro and Netflix. The Motley Fool recommends DreamWorks Animation, Hasbro, and Netflix. The Motley Fool owns shares of Hasbro and Netflix. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.
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