DreamWorks Animation SKG

DreamWorks Animation SKG started as a division of DreamWorks SKG. The company was originally founded by Steven Spielberg, Jeffrey Katzenberg and David Geffen in 1994. Geffen, a well-known music producer and founder of Geffen Records, found fame through the signing of artists like Nirvana, Aerosmith, and Guns N’ Roses. Of course, by 1994, Steven Spielberg was already recognized as one of the most innovative and imaginative directors-producers of all time. Among Spielberg’s best-known films are Schindler’s List, Jurassic Park, and Saving Private Ryan. In fact, Spielberg met Jeffrey Katzenberg while working on Who Framed Roger Rabbit in 1988, where Spielberg was an executive producer and Katzenberg was a production manager. At that point, Katzenberg decided to fulfill his dream and establish a new company after being “a long-time member of the Disney Animation Studio (who) was sent into a forced resignation by company president Michael Eisner,”(Grant, 6). Katzenberg combined forces with Spielberg and Geffen and “all three men contributed $33 million to start the company” (Grant, 9). Of course, realizing that additional capital is never a bad thing, “Microsoft co-founder Paul Allen, pitched in $500 million, to aid in jumpstarting the interactive division” (Grant, 9). In 2004 DreamWorks Animation SKG separated from DreamWorks SKG to become its own publicly-traded company, DWA on NASDAQ, with Katzenberg at the helm. However, despite some analyst’s brooding predictions for DWA, a closer inspection of their operations reveals a number of benefits not only in purchasing the stock but in holding onto for a very long time.

Looking at the future projections concerned with the financial solvency of DreamWorks Animation, it is clear why many on Wall Street think it’s a bad buy. Since going public in 2004, the company has experienced stock prices that average only three quarters the price of the security at the initial public offering (DreamWorks Animation). Based on historical performance, DreamWorks stock has shown little merit as a long-term investment. Nonetheless, 2013 has been a unique year for the company, with DWA’s stock price surging from just below $16 in January to more than $32 as of Novermber 18th. Not many publicly traded firms can boast a 100% return on investment in less than 12 months, but that’s exactly what DreamWorks delivered this year, much to the dismay of bearish analysts who were short when prices began to climb. And even though the bump in stock prices as of recent may be due in large part to the successes of many box office hits like “The Croods”, which accounted for much of the mid July surge in price after grossing nearly $600 million (Calia), the numbers offer their own justification as to why DreamWorks Animation is a solid buy.

Looking at some of the income statement data, it is clear to see that DreamWorks, despite the recent surge in stock price, has significant expenses this year in their accumulation of assets. One of the more significant findings upon examination of the company’s financial statements was the steep jump in the cost of revenues, which had a profound impact on the company’s net income, and, as a result, their bottom line. Cost of Revenues for 2013 increased more than 40% from a year prior to almost $679 million dollars, up from $480 million. Additionally, Net Income has decreased from roughly $170 million in 2010 to losses of nearly $36.5 million in 2013, though increased expenses like played a significant role in the reduction of income. Still, the apparent plummet characterized by figures in the financial statements is not without reason.

Foremost among the explanations as to why DreamWorks Animations represents a sound investment are some of the figures surrounding the book value of its assets. A look at the balance sheet for 2013 shows a reduction in Cash and Cash Equivalents of nearly $60 million, and with no pending litigation or other drains on cash, it is clear that DWA has been in a state of frenzy as regards their recent acquisitions activity. Glancing at some of the line items, there are a few that stick out, like Intangible Assets- Net of Accumulated Amortization, which went from $0 in 2011 to nearly $150 million in 2012. This came about largely as a result of the company’s acquisition of Classic Media (DWA, 51), another production entity that will only serve to enhance operational income going forward. Conversely, another prominent figure that showed up in the analysis of financial statements was the sudden appearance of a $165 million liability.

One of the unique financing components associated with the operations of DreamWorks Animations is the company’s indefinite revolving credit facility. The revolving credit facility is essentially a line of credit available to DreamWorks in the event that cash flows from existing motion pictures or other projects are insufficient to finance future endeavors. This particular line of credit enables DreamWorks to maintain up to $400 million at any one time, and in the latter months of 2012 the company took out $165 million in debt (DWA, 46). As such, this loan represented a substantial increase to total liabilities, greatly contributing to an almost 42% increase in the account balance from just over $422 million to just shy of $600 million. Still, it appears that the bulk of their recent financing was allocated to acquisition operations and other addition-of-asset ventures, as the total level of assets saw an increase from 2011 to 2012 of $1.78 billion to $1.94 billion, respectively. Furthermore, the surge in assets results in some very interesting metric evaluations.

While the P/E ratio may not be the most luring metric in attracting buyers of DreamWorks stock, the company’s abundance of assets makes it a prime candidate for investment. That the company has so many assets with which to operate, many of them only acquired in the last year or two, indicates a company that is on the verge of experiencing significant growth in revenue. Perhaps the most astounding measurement of the inherent value of this company is its Enterprise Value. The Enterprise Value of DreamWorks is actually negative by nearly $165 million, which means that any company with a mind to purchase DreamWorks would instantaneously receive a $165 million discount of the purchase price, simply because of the Cash and Equivalents that the company has on hand. Additionally, while not the most glamorous of metrics, the book value of assets owned by DreamWorks acts as a sort of cushion in the event that the company succumbs to market volatility and is forced to liquidate. While doing so might not bode well for investors, the sheer dollar amount of the company’s assets at book value would more than reimburse investors’ contributions.

It should be noted, however, that the DreamWork’s assets and stock price aren’t the only reasons that make stock in DWA a sensible purchase. In order to alleviate some of the pressure from their recent debt load, Ben Eisen of Marketwatch.com reported that the company recently issued $155 million in bonds maturing in 2020 to help pay down their revolving credit facility obligation (Eisen). Furthermore, the author remarks that DreamWorks Animation, although a smaller studio than some of the more dominant outfits here in the United States, differentiates itself in a number of ways. The company has begun to realize the profit potential in online content streaming and as such, recently partnered with Netflix to more seamlessly accommodate the transition (Eisen). DreamWorks also purchased a YouTube channel, AwesomenessTV, and has begun expanding its operations in China, two clear indications that the company is actively diversifying its operations in an attempt to reach a broader market. In fact, one article notes that by 2015, such expansions will have doubled the annual revenue from the television business to $200 million (Kidla). Such measures represent a concerted effort on behalf of management to keep the company solvent, which isn’t always an easy task when profits become entangled with an absentminded Board of Directors or stakeholders.

Diversification, an important aspect of financial solvency for publicly traded companies, is not in and of itself a comprehensive approach to success—there are other mitigating factors. For DreamWorks, some of the most notable indications of long-term stability are the fact that they are quick to pay off their debt, noted in the valuation overview above, and that there are expectations of a huge surge in cash in the coming years. Looking at the Cash Flow Statement for DreamWorks, the next five years for DreamWorks show a lot of promise in terms of cash flow from operations. While the balance has steadily declined in the last few years, their recent acquisitions account for a large percentage of such reductions. Looking forward though, expenses are expected to decrease, as they have historically, as it appears that the company is continually adjusting and improving its efficiencies. This, combined with the company’s projections concerning previously erratic surges in various accounts that should stabilize in the next few years, set the stage for a dynamic jump in DWA stock that has not occurred since going public some two decades ago.

DWA, despite analyst predictions and those who are to quick to scrutinize earnings reports not aligned with current estimates, is a sound investment for those seeking a long-term return on their portfolio. While it is not likely that 2014 will see another 100% increase in stock price, it is reasonable to expect growth in the range of 10-30% simply as a result of increased operations and the likelihood that any large acquisitions in the company’s crosshairs have already been executed. As such, one can rest assured that the only direction for DWA stock at this point is upward.

Works Cited

Calia, Michael. "Dreamworks Animation posts 74% higher profit." MarketWatch, 2013. Web. 19 Nov 2013. <http://www.marketwatch.com/story/dreamworks-animation-posts-74-higher-profit-2013-07-31>.

"DreamWorks Animation SKG Inc. Cl A." Marketwatch.com, 2013. Web. 19 Nov 2013. <http://www.marketwatch.com/investing/Stock/DWA>.

"DWA-12.31.2012-10-K." Sec.gov, 2013. Web. 20 Nov 2013. <http://www.sec.gov/Archives/edgar/data/1297401/000129740113000005/dwa-12312012x10xk.htm>.

Eisen, Ben. "DreamWorks says ‘lights, camera, action’ on bond market debut." MarketWatch.com, 2013. Web. 20 Nov 2013. <http://blogs.marketwatch.com/thetell/2013/08/06/dreamworks-says-lights-camera-action-on-bond-market-debut/>.

Kudla, David. "Dreamworks diversification is a plus for investors." MarketWatch, 2013. Web. 20 Nov 2013. <http://www.marketwatch.com/story/dreamworks-diversification-is-a-plus-for-investors-2013-07-08>