An analyst upgraded DreamWorks Animation SKG Inc. on Monday, saying the stock has come down to more "reasonable" levels after speculation of a possible buyout has faded.
Caris & Co. analyst David Miller said investors bought up DreamWorks shares after Walt Disney Co. announced its $4 billion acquisition of Marvel Entertainment Inc. in August, fueling speculation that DreamWorks might be purchased as well.
But when the buyout possibility dimmed over the past months, DreamWorks shares fell 15 percent from a "frothy" 52-week high, the analyst said.
As such, Miller upgraded the stock to "Average" from "Below Average," meaning shares are expected to trade in line with the market.
"The market is now resigned to the notion that a take-out of DreamWorks Animation will not happen anytime soon," he said in a research note.
Miller said Disney is obviously out of the picture as a buyer, CBS Corp.'s businesses are not complementary with DreamWorks and News Corp., while a possibility, is not likely because it already has its own animation studio.
Viacom Inc. doesn't have the cash to buy DreamWorks and isn't likely to pile on debt for an acquisition because it would hurt its credit rating.
That leaves Time Warner Inc. as the most likely candidate as a buyer, he said. It has $7 billion in cash, although $2 billion is being reserved for debt repayment. However, Time Warner also said it would boost dividends, buy back more stock and increase its cash levels.
"Is Time Warner in favor of blowing the balance of that cash hoard on acquiring a franchise animation studio? We don't think so," Miller said.
With buyout speculation diminished, he focuses instead on DreamWorks' meeting with analysts on Tuesday at its headquarters in Glendale, Calif., where the company will talk about several new films. These include "How To Train Your Dragon," coming out in March, "Shrek 4" in June, and "Megamind" in November.
Miller said Wall Street analysts on average expect DreamWorks to earn $2.33 per share in fiscal 2010, but the forecast could be at risk if "How to Train Your Dragon" falls short of "fairly lofty" expectations.
The stock rose by 90 cents, or 2.8 percent, to $33.43 in midday trading.