Mr Peabody and Sherman

After a disappointing second quarter earnings call Tuesday, it has become clear to analysts that DreamWorks Animation must alter the way  it does business.

“I have no issue with the creative, DreamWorks Animation films are great,” said David Miller of Topeka Capital Markets, “but we’ve been harping on them for quite some time that they should lower their average negative cost for every film.”

The studio has already decreased its average budgets per film from $140 million to $125 million, but that’s still pretty high considering that one competitor, Illumination Entertainment, made “Despicable Me” for $69 million and its sequel, “Despicable Me 2” for $76 million.

During the Glendale-based studio’s earnings call this week, CEO Jeffrey Katzenberg announced that the budgets of upcoming films “Penguins of Madagascar” and “Home” were boosted to $135 million each, roughly $10 million more than originally planned.

Miller also pointed out that unlike several of its rivals, “There is really no brand name associated with DreamWorks. Families aren’t going to go see ‘Penguins of Madagascar’ because it’s a DreamWorks Animation film.” Disney, Marvel and Pixar are really the only established animation brands, adds Miller. “Families will go see those films because they are Disney or Pixar films.”

After DreamWorks’ announced its disappointing earnings, reporting a net loss of $15.4 million or 18 cents per share, the studio’s stock was clobbered Wednesday. It fell nearly 15%, hitting a 52-week low of $19.20 per share. It closed Wednesday at $19.98 per share.

During its second quarter earnings call, DreamWorks Animation also disclosed an ongoing investigation with the U.S. Securities and Exchange Commission regarding the $13.5 million writedown of film inventories the studio took on “Turbo” in February.

Media analyst Doug Creutz, of Cowen & Co., noted that DWA is the worst performing media company this year and hasn’t made any money in three years.

“They should be cutting the price of their movies,” Creutz said. “But the problem is, if you spend less money, any given movie is going to be even less differentiated and be even harder to sell. So DreamWorks is in a very difficult situation.”

This marks the second poor quarterly report for the animation studio. Year over year, DreamWorks Animation revenue dropped 31% to $147.2 million in the first quarter of 2014, a net loss of $43 million. That’s primarily due to the soft box office performance of “Mr. Peabody & Sherman,” for which the studio took a $57 million writedown.

The animation field has been “rather saturated,” added Wall Street analyst Hal Vogel, “and the principles of good business have been ignored by most people. It doesn’t appear that these ventures are earning the cost of capital,” which is essential to being profitable.

DreamWorks Animation is in the process of diversifying its business, having acquired AwesomenessTV and launching DreamWorksTV on its YouTube channel. DWA’s balance sheet has weakened as a result of its recent investments. The $400 million in debt and $32 million in cash at the close of Q2 paints a very different picture than the $116 million in cash and no debt the company had at the end of 2011, said Creutz.

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