Monday, January 22, 2007

Calls of Note Part 6

- Cowen is cautious on DreamWorks (NYSE:DWA) saying they expect DWA to announce a $115MM write-down to Q4:06 earnings for Flushed Away when the company reports earnings on February 27th. The film has generated roughly $163MM in worldwide box office to-date, and wthey expect minimal additional box office for the remainder of the film's run. Firm now expects a final worldwide box office of $168MM versus pre-release estimate of $269MM.

As a result, they are lowering their estimate of Flushed Away's lifetime gross revenue from $424MM to $265MM, and estimate of the film's lifetime profit from $48MM to a loss of $97MM. At the time of DWA's secondary offering in November, management announced that a write-down would be necessary. However, Cowen believes that their estimate of the size of the write-down is larger than current Street expectations. DWA will have taken write-downs on two of its last three films.

Firm notes that the Street consensus EPS estimate for FY06 is $0.58. They believe FY06 estimates are too high given the performance of Flushed Away, and expects estimates to come down significantly over the next several weeks as analysts factor in the likely impact of the production cost write-down.

While the firm believes DWA shares could trade down in the near term due to FY06 estimate reductions, the build-up to the May 18th release of "Shrek the Third" could drive the shares higher over the next few months. However, recent film performance could ultimately cause investors to reassess DWA's long-term earnings power, leading to pressure on DWA shares.

Notablecalls: I think Cowen is right with their call on DWA. The stock has run too far and now looks toppish. Given the possible magnitude of Flushed Away's write-down, I think the stock's a short here. Cowen's comments are actionable. DWA needs to rethink their marketing strategy.

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