Try DreamWorks And Lionsgate If You Want The Best Box Office Upside

Pacific Crest’s Evan Wingren initiated coverage of Dreamworks Animation Skg Inc DWA and Lions Gate Entertainment Corp. (USA) LGF with Overweight ratings.

DreamWorks

The price target is at $31. “The company is transforming itself into a major supplier of content to SVOD and emerging platforms, which, combined with recent theatrical restructuring, is likely to drive growth, expand margins and limit potential downside,” analyst Evan Wingren wrote.

DreamWorks is poised to capitalize on the global demand for original programming from emerging platforms. The company could generate $400 million in TV production revenue by 2018, implying a CAGR of 40 percent from the $103 million generated in 2014, Wingren said.

“Given A-list talent, strong directorial talent, an attractive window (scheduled for 4Q16), and consumer product potential, we believe Trolls will be successful,” the analyst added.

Lions Gate

The price target is at $27. Wingren mentioned that the long-term risk/reward appeared favorable. He added, “Secular tailwinds from the demand for original programming, coupled with a film model that limits downside exposure, are likely to lead to share price appreciation.”

Investment in original content is growing, backed by a shift to on-demand viewing, and this is likely to benefit Lions Gate. Original demand is expected to continue to grow in the coming years and the company’s TV production business could exceed $1 billion in revenue in F2018, implying a 5-year CAGR of 22 percent, the analyst said.

Stable revenue from TV and library content could offset volatility around films. Films older than two years and managed brand content in TTM had contributed about $500 million, or 31 percent, of motion picture revenue. “This revenue stream has high margins and is stable in comparison to other theatrical revenue,” the Pacific Crest report stated.