Sunday, January 18, 2015

Corporate Dynamics

The Fool (not me) thinks DWA has work to do.

... Since 2012, [DreamWorks Animation] 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. ...

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%. ...

I've been concerned for years about DWA's business model of "Make a hit movie. Repeat. Make a hit movie. Repeat. Make a hit ..." etc. It's a fine corporate dream, but it's a dream that's unsustainable.

The long-term solution: Get the company diversified, then find a corporate suitor and merge with some conglomerate or other. But another company paying a premium for DWA stock? Especially if the corporation isn't firing on all cylinders? In all likelihood, that won't be happening.

The short-term solution: A big, brassy new installment of the Shrek franchise, with songs and dancing.


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