While many investors are selling now, and with DreamWorks shares trading at their lowest price in nearly two years, is now a good time to buy in?
Let's explore the details.
The good, the bad, and the ugly
It's not all bad news financially for DreamWorks. In fact, year over year, the company reported a 17% rise in revenue and a 10% increase in profits for Q3 2014. And the company has had some recent movie successes. How to Train Your Dragon 2, released last May, earned $619 million at theaters worldwide in 2014 and captured an Oscar nomination for best animated feature. The movie's release for home entertainment in Q4 is expected to have a strong positive impact on Q4 results as well.
However, DreamWorks' latest wins haven't exactly offset losses experienced from other box office misses, such as Mr. Peabody & Sherman, and as a result, DreamWorks will post a substantial loss when the company reports Q4 and 2014 year-end earnings on Feb. 24.
Making matters worse, DreamWorks' last two years of flops have come at a time when competitors are seeing some of their biggest successes ever. Walt Disney's (NYSE:DIS) animated features, such as Frozen, have been incredibly profitable for the company, breaking records in terms of animated film revenue.
With its competitors continuing to outperform the company, DreamWorks has devised major plans to put the company back on track.
DreamWorks starts a U-turn
To save the company's future, management has embarked on a plan to save $30 million overall in 2015 and $60 million by 2017, primarily by cutting nearly one-fifth of its employees, realigning management, and releasing just two movies a year.
By implementing substantial changes, such as replacing the company's COO, DreamWorks hopes to be moving back toward a level of creativity and quality that once brought it profitable operations.
At one point, DreamWorks was pumping out success after success with quirky films such as Shrek and Kung Fu Panda, which made the company a disruptive force in the animation business. By reducing the size of its studios and number of films as a way to maximize creativity, DreamWorks CEO Jeffrey Katzenberg has committed to getting the company back to that level of quality.
And there are other initiatives that could provide additional revenue streams in the future. The company has made strategic investments throughout Asia, including a 45% stake in DreamWorks Oriental, a Chinese conglomerate set to grow the brand name in China, with plans for an eventual Chinese theme park outside Shanghai. It's this conglomeration that's working on the development of Kung Fu Panda 3.
With a rough past and hopeful future, is it time to invest now?
At its current price, the lowest in nearly two years, DreamWorks stock seems oversold on the restructuring news. Thanks to its restructuring plan and the company's new operating initiatives, this might be the turnaround point for DreamWorks to become a highly-profitable company once again.
Of course, there's a risk that the company will find itself in a cash crunch if revenue sources, such as another major hit movie, don't pan out soon. Yet even after this restructuring writedown of around $290 million, DreamWorks should hold plenty of cash remaining, so a liquidity crisis seems unlikely. The company also has the ability to sell part of its stake in other past investments, which could also provide emergency cash if necessary.
Nevertheless, it's probably a good idea to wait just a bit longer before you buy in. Long-term-focused investors don't typically try to "time" the market or stocks that they believe hold a lot of upside. And when Q4 and full-year 2014 earnings are released on Feb. 24, its likely that the company will report major income losses for the year. When that happens, the market is probably going to give us another little sell-off, so letting the dust settle before making an investment might be a good idea.
Bradley Seth McNew owns shares of Walt Disney, and after hearing "Let It Go" from Disney's Frozen earlier today in a department store for the gazillionth time, he's reaffirming his excitement about owning those shares. The Motley Fool recommends DreamWorks Animation and Walt Disney and owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.