DreamWorks shares take a kung-fu hit after earnings report

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Wall Street is scaling back its dreams for shares of DreamWorks Animation SKG.

The Glendale studio’s stock tumbled today after the firm’s second-quarter earnings report late Tuesday.

Although DreamWorks’ profit of 28 cents a share (excluding a tax benefit) beat the consensus estimate of 23 cents, analysts are reining in their expectations for earnings growth over the next year.

Goldman, Sachs & Co. analyst Ingrid Chung said she still considered the stock a ‘buy’ but pulled it from the firm’s highlighted ‘conviction buy list.’ She cut her 2009 earnings estimate to $1.75 a share from $1.87, citing expectations for higher foreign marketing costs for the hit ‘Kung Fu Panda’ and for DreamWorks’ next movie, ‘Madagascar: Escape 2 Africa’ (due Nov. 7).

That’s the problem of the weak U.S. dollar coming home to roost: It’s costing DreamWorks more to market its films abroad.

Another expected drag on the bottom line -- although great for Glendale and environs -- is the company’s plan to spend $85 million over the next two years to expand and improve the Glendale studio, including for 3-D productions. DreamWorks sort of buried that announcement in the earnings press release.

Michael Pachter, who follows the company at brokerage Wedbush Morgan Securities, downgraded the stock today to ‘hold’ from ‘buy’ and trimmed his 2009 profit estimate to $1.71 a share from $1.78, also citing expected higher costs.

Analysts still are upbeat about the company’s long-term outlook given its movie successes and the likelihood of profitable spin-offs (such as the upcoming stage show ‘Shrek the Musical’). But with the studio warning on costs, Wall Street is retreating until future profit streams have more ‘visibility,’ as Pachter put it.

The stock ended down $2.72, or 8.7%, to $28.57, after falling as low as $27.20. It’s still beating the market year to date, up almost 12% after falling 13% last year.