DreamWorks (DWA): Stock to Disappoint in Q1 Earnings?

DreamWorks Animation SKG Inc. DWA is scheduled to release first-quarter 2016 results on May 5, after market close.

In the fourth quarter of 2015, the Glendale, California-based company posted a massive positive earnings surprise of 223.53%. In fact, the company beat the Zacks Consensus Estimate in each of the last four quarters, by an average of 119.42%.

Factors at Play

We believe that more than the first-quarter report, investors keenly await an update on Comcast Corporation's CMCSA recent announcement that it has entered into a deal to buy DreamWorks. The deal, expected to close by Dec 31, 2016, has an equity value of approximately $3.8 billion.

Coming back to first-quarter results, we expect the company to be hurt by higher costs. We believe that higher promotion and distribution expenses coupled with the implementation of new technologies will hurt margins. Moreover, the company is exposed to foreign currency exchange rate risk with the release of the movies outside the U.S.

Furthermore, the lack of business diversification at DreamWorks is a cause of concern. The company depends extensively on its Feature Films segment. Consequently, below-par performance of the unit will hurt results significantly.

Earnings Whispers

Our quantitative model shows that the company is likely to disappoint in the first quarter. Here's why:

DreamWorks does not have the right combination of two key ingredients – positive Earnings ESP and a Zacks Rank #3 (Hold) or better – required to top expectations.

Zacks ESP: Earnings ESP for DreamWorks is -200.00%. This is because the Most Accurate estimate currently stands at a loss of 3 cents, wider than the Zacks Consensus Estimate of a loss of 1 cent per share.

Zacks Rank: DreamWorks carries a Zacks Rank #3 (Hold) which increases the predictive power of ESP. However, the company's negative ESP makes surprise prediction difficult.

Meanwhile, we caution against stocks with a Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement.

Stocks to Consider

With DreamWorks likely to disappoint, we present below some other companies in the broader Consumer Discretionary sector you may want to consider as our model shows these have the right combination of elements to post an earnings beat this quarter.

Discovery Communications, Inc. DISCA, with an earnings ESP of +2.22% and a Zacks Rank #3. The company is scheduled to report first-quarter 2016 earnings on May 5.

Time Warner Inc. TWX, with an earnings ESP of +1.55% and a Zacks Rank #3. The company is slated to report first-quarter 2016 results on May 4.

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