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DreamWorks' How to Train Your Dragon 2 Pulls Stock Price Down

Zacks Equity Research

DreamWorks Animation SKG Inc.’s (DWA) highly anticipated release, “How to Train your Dragon 2” garnered nearly $49 million in the U.S. in the opening weekend, falling well short of the expectation of $65 million. Notably, the flick was released last weekend across 4,253 domestic theatres.

DreamWorks’s top-line growth is highly dependent on the company’s Feature Film segment which accounts for nearly 75% of the total revenue. Hence, lower-than-expected revenue generation has resulted in a 10.97% drop in company’s share price during yesterday trade. At the close of market, the company’s stock price of $24.35 per share was close to a 52-week low.

Released four years back, the first film of the trilogy had grossed nearly $43 million in the opening weekend and generated an astounding total of $495 million. Riding high on the success of the first movie, DreamWorks remains highly optimistic about the second flick. The success of this newly-released movie may make a significant turnaround in the company’s struggling feature film segment.

Moreover, the analysts also raised their revenue expectations from the second part of the trilogy based on the success of the first part and the well-timed summer vacation release of the second.

On the bright side, “How to Train your Dragon 2” has collected nearly $75 million worldwide in the opening weekend while $145 million was spent in making the movie. The production costs were also 14% lower than the previous one. Moreover, the second part received 93% positive reviews on Rotten Tomatoes and a strong 8.7 rating on IMDB. The movie also holds the second spot for the highest grossing movie of the week, after “22 Jump Street” which collected $60 million domestically.

Given the volatile nature of the movie business, DreamWorks is striving to expand beyond the movie and home video business. Recently, the company has launched its online TV channel – DreamWorksTV – on Google Inc.’s (GOOG) YouTube. This multi-platform media service will combine DreamWorks’ original content library with the digital expertise of AwesomenessTV, which was acquired by DreamWorks in May 2013.

The company has also entered into an online streaming agreement with Netflix Inc. (NFLX), created publishing and television operations and licensing its animation characters to theme-parks.

In the first quarter of 2014, the company incurred an operating loss of $62 million against a profit of 5.4 million in the prior-year quarter. Likewise, net loss came in at $42.9 million compared with a net income of $5.6 million in the year-ago quarter.

However, animated movies have done well so far in 2014 as both Rio 2 and The Lego Movie featured among the top 10 highest grossing movies of the year, generating over $450 million each. Thus, with only one film “The Penguins of Madagascar” left to be released this year, the company is likely to face troubled times.

DreamWorks currently has a Zacks Rank #3 (Hold).

A better-ranked stock in the movie industry worth considering is News Corp. (NWSA) with a Zacks Rank #2 (Buy).

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