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Friday, September 18, 1998
Pixar Inc.
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Phone: 510-236-4000
Website: http://www.pixar.com
Price (9/17/98): $34 3/8
HOW DID IT FIND TROUBLE?
Pixar had quite the spread laid out for its shareholder picnic -- then the Antz came. For the company behind the surprise 1995 blockbuster movie hit Toy Story, expectations were running high for the November release of A Bug's Life. A reworked deal with Disney <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> to share evenly in the profits had the stock soaring.
The film had a family friendly plot of an ant leading an insect circus in battle against attacking grasshoppers, all done up in computer-animated splendor. A few months later Dreamworks was slated to release its own insect-based animated full-length feature, Antz.
The consensus ran that A Bug's Life would do well, and four months later Dreamworks would be lucky if the public wasn't bugged over seeing another ant hero in ink. But for a Disney rival -- due mostly to the fact that the K in Dreamworks SKG stands for Jeffrey Katzenberg, the Disney mastermind behind Beauty & the Beast and The Lion King who left in a huff after failing to be promoted by Michael Eisner -- the chance to strike back at Mickey Mouse was too sweet to pass up.
With production efficiencies affording Dreamworks the flexibility for the coup d'etant, the company surprised everyone by bumping up the release date for its film to next month. The October 2 revision found celluloid analysts suddenly expecting A Bug's Life to become the redundant flick.
Shares of Pixar were dealt a blow, and took it in the thorax.
BUSINESS DESCRIPTION
Based out of California, Pixar has been a pioneer in computer animation technology. Using proprietary software, the company has done everything from Listerine commercials (remember the one with the bottle swinging from vine to vine as Baltimora's "Tarzan Boy" blared?) to licensing out its software for the computer-rendered dinosaurs in Jurassic Park.
Beyond the November release of A Bug's Life, a sequel to Toy Story is in the works for a 1999 holiday release. Pixar CEO Steven Jobs, the co-founder of Apple Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %> and now serving also as its interim CEO, owns a majority stake in Pixar.
FINANCIAL FACTS
Income Statement
12-month sales: $21.2 million
12-month income: $13.3 million*
12-month EPS: $0.27*
Profit Margin: 62.4%
Market Cap: $1766.9 million
(*From continuing operations)
Balance Sheet
Cash: $161 million
Current Assets: $167.2 million
Current Liabilities: $11.4 million
Long-term Debt: N/A
Ratios
Price-to-earnings: 127.3
Price-to-sales: 83.3
HOW COULD YOU HAVE AVOIDED THIS TROUBLE?
In June of 1997, with the stock trading in the low teens, UBS Securities issued a buy recommendation on Pixar. Back then the analyst figured the shares couldn't get any cheaper. They didn't. A year later, with the stock passing analyst Ed Hatch's $59 a share price target, UBS downgraded the shares. According to Hatch, the stock was fully valued given the best-case scenario of profitability for A Bug's Life. It was.
No analyst is perfect, but Hatch seemed to have a beat on this company. Those who got out during the early summer downgrade were spared the Antz attack.
But even if one didn't heed Hatch immediately, there was still hope. Like an ant under a sun-enhanced magnifying glass -- this one burned out gradually. Two weeks after the downgrade, when the Antz ad blitz proclaimed the October release, the shares exchanged hands for as high as $60 a share. The decline came over the course of the next few weeks, not overnight as is often the case. Sizzle. Sizzle. Pop.
WHERE TO FROM HERE?
The past year has been a mixed bag for the company. Disney has announced plans to team up with Pixar for the theatrical release of Toy Story II, once a proposed direct-to-video production. With Woody and Buzz reuniting next year, the company has stripped away the notion that this would simply be a short-film producer with a full-feature epic every three years. On the other hand, Jobs continues to moonlight as Apple's interim CEO. While Jobs is not a critical factor in the day-to-day operations at Pixar, he is the majority shareholder.
The distraction can get annoying. And, while it may have been expected to lay off under a dozen employees in July as A Bug's Life production wore down, in a company where the creativity think-tank runs deep, morale problems can easily spring leaks.
The company should take solace in the fact that the Antz rush job may ultimately prove to work in Pixar's favor. Pixar has had a tie-in deal for quite some time with toymaker Mattel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAT)") else Response.Write("(NYSE: MAT)") end if %>. Dreamworks didn't sign up the smaller Playmates Toys for its own product line until just last month, giving the company just two months of lead time rather than the usual twelve months to hit the stores. Pixar is going to win the merchandising war.
And unless the charm of Woody Allen's lead voice in Antz runs thick, by the time A Bug's Life opens six weeks later movie theater chains will be quick to toss out the tired Antz remains in favor of the fresh insect animated feature. While A Bug's Life will have to compete against Rugrats: The Movie in November and Dreamworks' Prince of Egypt in December, it will also have the lucrative holiday periods to showcase its wares.
If Pixar's insect treatment can come even close to Toy Story's success, the company will have two amazing franchises for Disney to work its merchandising magic on. That is why Hatch, even as he downgraded Pixar, had to raise his earnings estimates. He is looking for the company to make $0.70, $2.14, and $2.48 a share, respectively, over the next three years.
Like a caterpillar, Pixar may have been a slow traveler in the past -- but now it has a lot of legs.
-Rick Aristotle Munarriz
([email protected])
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