© 2003, DOW JONES & COMPANY, INC. ALL RIGHTS RESERVED
MONDAY, OCTOBER 13, 2003
Will Steve Jobs jilt Disney? No matter what happens, Pixar stock seems overvalued TINY PIXAR IS THE HOTTEST TICKET in Hollywood. Fresh off the huge success of its latest animated movie, "Finding Nemo," an emboldened Pixar is bargaining hard over a new film-distribution agreement with its partner, Disney, while weighing offers from other studios. "Finding Nemo" is the highestgrossing movie in the U.S. this year, with projected domestic box-office revenue of more than $335 million. "Nemo" is expected to generate over $1 billion of revenue after international distribution and video sales, netting about $500 million in total profits. "Finding Nemo" is the latest in a five-film string of Pixar-made, Disney-distributed winners that' s included "Toy Story," "Toy Story 2," "A Bug' s Life" and "Monsters Inc." Based on unconfirmed reports out of Hollywood, Disney and Pixar may be near a deal giving Steve Jobs, Pixar' s chief executive and controlling shareholder, much of what he wants. Jobs is seeking to give Pixar greater profits and control of its next two movies, which are governed by the existing agreement with Disney. Pixar' s "The Incredibles" is due in late 2004 and "Cars" in November 2005. The current agreement gives Pixar, which is based in Emeryville, Calif., and Disney equal profits from the next two movies after Disney is paid a distribution fee estimated at 12% to 13% of total revenues. This effectively gives Disney more than 60% of each movie' s profits. Pixar BY ANDREW BARY and Disney share the cost of producing and marketing the movies, which can run over $200 million for each. Jobs also reportedly wants Pixar to get all the profits from its eighth movie, due in late 2006, in return for bearing all the costs. Disney would get just a distribution fee of 7% to 10% in the new arrangement. Under the terms of the current Disney contract, Pixar was able to begin discussions about a new distribution deal after making "Nemo." The performance of "Nemo" and optimism that Pixar will succeed in hammering out a lucrative deal with Disney or another studio have fueled a sharp rally in Pixar shares this year. Pixar, at 71, is up 26% since the late-May opening of "Nemo," and has gained 34% this year. The company' stock rose $1 last week. Its market value now tops $4 billion. The company, the leading maker of computer-animated movies, clearly is riding high, but its shares look richly priced, already seeming to discount any very favorable new distribution deal and future "Nemo"-like hits. It' s a stretch to value at $4 billion a hit-driven studio with a library of just five films that will be able to produce just one movie annually at least through 2007. The stock trades for a lofty 40 times projected 2003 profits of $1.75 a share and for 55 times estimated 2004 earnings of $1.30 a share. Pixar is expected to generate $235 million in revenues this year, up from $201 million in 2002, resulting in a high price/sales ratio of 18.
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Several analysts, including Michael Savner of Banc of America Securities, peg fair value for Pixar in the low 60s, while a more bearish Rich Bilotti of Morgan Stanley carries a price target of 45. The bull case is that Pixar' s earnings could double under a new distribution agreement, letting it net $3 to $4 a share annually. Put a price/earnings multiple of 25 on $4 in yearly earnings and Pixar eventually could hit 100. But profits of $3 to $4 a share may not be achievable until 2007, the year after the projected release of Pixar' s eighth movie and the first under the new agreement. That film is...
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