Pixar Inc.
(Nasdaq: PIXR)
Phone: 510-236-4000
http://www.pixar.com
Price (11/3/97): $24 5/8

HOW DID IT DOUBLE? So Woody, the envious cowboy of Toy Story fame, turns to Buzz Lightyear and tells him he cannot fly. The determined astronaut leaps toward the sky, falls, bounces back, loops around and shoots into the air.

"Can!"

So also goes the flight of computer animated film specialist Pixar's stock. The company's IPO was timed perfectly. Shares of Pixar made their debut just as Toy Story was gearing up to become the runaway hit of the 1995 holiday season. In the euphoria the stock went to infinity and beyond for the first few trading days. Then, like Buzz, gravity sent the stock crashing down to Earth. As huge as the flick was, the celluloid upstart was a slave to Disney.

Pixar's take was meager, with the lion's share of the profits going to Disney. While the company still made out nicely in residuals from not only the movie and video but from the video games as well, investors decided the company was not worth the $1.5 billion market cap it sported at its December 1995 peak.

That all changed this February when Pixar renegotiated its deal with Disney. While Pixar's theatrical releases would continue to be tied to exclusively to Disney, the companies agreed on an even split of the take. The day of the announcement the stock shot up $7 to $21 a share.

While it eventually gave back those gains by early summer, a pair of huge quarterly earnings reports has warmed the hearts of those looking for an earnings-based double.

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.

Next year the company will produce its second Disney feature, A Bug's Life. A direct-to-video sequel to Toy Story is also in the works.

Pixar CEO Steven Jobs, the co-founder of Apple Computer and now serving also as its interim CEO, owns a majority stake in Pixar.

FINANCIAL FACTS

Income Statement
12-month sales: $37.1 million
12-month income: $22.4 million
12-month EPS: $0.47
Profit Margin: 60.4%
Market Cap: $1204.2 million

Balance Sheet
Cash: $172.4 million
Current Assets: $175.8 million
Current Liabilities: $9.3 million
Long-term Debt: N/A

Ratios
Price-to-earnings: 52.4
Price-to-sales: 32.5

HOW COULD YOU HAVE FOUND THIS DOUBLE?

As a cyclical company, Pixar is at the mercy of its production pipeline. With three years separating Toy Story and A Bug's Life, it is easy to see why the stock has languished for most of the last two years. Yet for it to fall apart in the months following the reworked Disney deal was a buying opportunity. Granted, the $14 June lows were not as cheap as the $12 3/4 bottom the shares had fetched back in January, but given the lucrative alliance with the leader in traditionally animated classics, it was a bargain waiting to be scooped up.

UBS Securities stepped in with a "buy" recommendation at the time. The analyst figured the stock could not trade any lower and advised clients to hop onboard before investor enthusiasm for the 1998 release drove shares higher.

It proved true -- and Pixar proved that one didn't have to wait for 1998 for earnings surprises. In July the company reported earnings of $0.19 a share for the quarter, more than double the $0.09 consensus estimate among analysts. Last month the company did it again, blowing away the $0.02 per share projection with an $0.08 a share showing.

WHERE TO FROM HERE?

Whose Jobs is it anyway? Pixar CEO Steve Jobs founded Apple Computer working out of a garage with Steve Wozniak. He has never quite been able to pry himself away. After his departure he founded NeXt Computer, which, fittingly enough, he sold back to Apple. Today Jobs finds himself once again at the struggling computer maker, this time as interim CEO.

Two weeks ago Pixar's CFO noted that Jobs has no intentions of leaving Pixar. The post at Apple would be strictly temporary. Then again, back in July The San Francisco Chronicle ran an article saying that Jobs e-mailed his Pixar employees telling them he was not interested in taking the top post at Apple that was vacant since the Apple directors ousted Gilbert Amelio weeks before. Well, he has, at least for the short-term.

Even if Jobs were to leave Pixar, the company should continue to flourish unless Jobs were to sell his 60% stake in the open market -- highly unlikely. While Jobs was instrumental in the Disney negotiations, it is John Lasseter, Toy Story's director, who is the creative heart of Pixar and he has no intentions of leaving.

Besides, charismatic visionaries are not in short supply at Pixar. This summer Mattel's CEO Jill Barad became the fifth member of the Pixar Board of Directors. Barad was instrumental in the marketing of Barbie. Ironically enough, Mattel was one of the few companies not represented in Toy Story when it refused Pixar the right to use Barbie as the movie heroine. The role eventually went to Little Bo Beep. A lot has changed since then. When A Bug's Life is released next year, it will be a merchandising threesome among Disney, Pixar, and Mattel.

Pixar has finally arrived, but is it just a flying toy? If next year's features come close to Toy Story's success, the stock seems very well destined to go to infinity -- and beyond.

-Rick Aristotle Munarriz (tmfedible@aol.com)

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