Analyst Upgrades DreamWorks Animation Stock, Cites Netflix Deals, 'Kung Fu Panda 3'

FBR's Barton Crockett sees "potential for large checks from Netflix" and "positive tracking" for the upcoming sequel, adding the stock to his firm's list of top picks.

FBR & Co. analyst Barton Crockett on Tuesday upgraded his rating on the stock of DreamWorks Animation, citing near-term upside from the upcoming release of Kung Fu Panda 3 and recent deals with Netflix.

He upgraded the stock to "outperform" with a $29 price target and placed it on FBR's list of top stock picks. "Near-term there are potential catalysts that are likely to move the shares up," wrote Crockett. "In particular, we see potential for large checks from Netflix for movie catalog rights and expanded TV production and positive tracking for Kung Fu Panda 3, due out Jan. 29."

Crockett cited Box Office Analyst as saying tracking for Kung Fu Panda 3 is stronger than it was for Inside Out at the same point before its opening, predicting a total domestic run in the $185 million-$200 million range. Panda 3 "has no meaningful new animated movies to compete with in February and a prime spot in Chinese theaters heading into Chinese New Year, helped by a co-production relationship with affiliates of the Chinese government," the analyst explained.

He also lauded a recent global Netflix TV deal. "Terms were not disclosed, but Netflix basically gains global rights in 180 countries to the first-run TV shows Netflix was obtaining from DWA in 40 countries," wrote Crockett. "Netflix also gains second-window rights to these shows. The contract appears supportive of our view that TV segment revenues can rise 50 percent in 2016 and argues for growth in 2017 and rising margins."

Plus, a Netflix DWA film catalog deal also will have financial benefits, he highlighted. "The Netflix fees for the initial library could be recognized at once, potentially in the fourth quarter, as the contract was probably signed in late December and the movies made available to Netflix then, before the early-January press release," the analyst wrote. "We assume that Netflix pays a license fee in the high tens of millions of dollars, with high contribution margins since film production costs are already amortized, driving total film library revenues to near $100 million in the fourth quarter."

The Netflix deal assumptions drove Crockett's fourth-quarter earnings forecast to $1.04 per share, "well above consensus."