Pixar shares may feel that way, after Disney (NYSE: DIS ) completed its buyout of the computer-animation pioneer over the weekend. Pull up a quote on Fool.com, and PIXR will come up as an unknown ticker. But we know better. Pixar is far from worthless.
Its investors are now receiving 2.3 shares of freshly minted Disney stock for each Pixar stub they hold. The deal, which was valued at $7.4 billion when it was first announced, was ultimately worth $8.3 billion, as improving fundamentals at both companies propelled the shares higher.
Despite that expense, Disney is feeling just fine. It's inheriting Pixar's $1 billion war chest, which offsets the sting behind the lofty price tag for a company that Disney could have conceivably acquired for a fraction of that price years ago. Disney is also picking up a proven player that will widen its margins. Last year, Pixar clocked in with a whopping 53% net margin -- in a year in which it didn't even have an actual movie release on the slate. Will it be enough to nudge Disney's margins into double digits after last fiscal year's 9% showing? If Pixar lives up to its legacy, you'd better believe it.
More than just pixels
Disney didn't just swallow a lucrative partner when it absorbed Pixar. After Pixar's release of Cars next month, the animation upstart had every intention to go it alone; there was no reason for a cash-rich and reputation-rich company like Pixar to overpay for film distribution and give Disney a 50% financial stake in its pictures. Some may see the buyout as Disney's attempt to sweep Pixar off its feet to avoid missing out on the movie company's high-margin bounty, but it's bigger than that.
As we speak, Pixar is energizing an increasingly tired Disney rank and file. Pixar executives like John Lasseter and Ed Catmull -- and, to a lesser extent, Steve Jobs -- are hunkering down in California to infuse Disney's other animated projects with some of that Pixar magic.
That's huge, because animation has had a trickle-down effect on Disney. Successful releases that create compelling characters have helped inspire new theme-park attractions and cable programming. Done well, theatrical animation is the grease that keeps the family-entertainment machine in motion.
The non-Pixar releases Disney already has in production won't be perfect, but it's reasonable to expect that they will be better. Disney needs that kind of brand-buffing shine as rival-rendered features sprout up all over the place. At worst, we have a glut on our hands. Every few weeks seems to breed a new animated feature at the local multiplex, and most of the recent ones have fared terribly.
The genre's far from dead, though. The top-grossing film of 2006 so far is Ice Age: The Meltdown. The sequel to News Corp.'s (NYSE: NWS ) 2002 smash has already topped the original, earning more than twice as much as any other film that has been released this young year. With a brand that popcorn-munchers trust -- and you know you can trust Pixar -- if you screen it, they will come. DreamWorks Animation (NYSE: DWA ) is close, but it's certainly no Pixar.
Disney circa 2011
Here's an even better exercise to get the gray matter percolating: Picture what Disney will look like in five years, now that it has the keys to Pixar. The "bigger than life" Pixar releases will become early-summer staples, but the company's influence will help beef up the quality of the rest of Disney's release slate.
We've seen Disney revive its fortunes at ABC, just as digital delivery is starting to matter. Now it has the perfect opportunity to hoist its name back up the family-entertainment flagpole where it belongs. For years, it seems we've never seen Disney hit on all cylinders. It can happen now, and Pixar could play a major role.
Disney has recently turned its attention to winning back the youngest of viewers. You and I may know about Disney's award-winning classics and its theatrical animation rebirth in the early 1990s, but if you're a 5-year-old kid, all you associate with the Disney name is stuff like The Wild, Home on the Range, or shoddy direct-to-video sequels. Pixar should save the day on that front; surely, every kid knows space ranger Buzz Lightyear or Nemo the clownfish.
Disney shareholders can't wait. It's been tough sledding since the House of Mouse's shares peaked six years ago, while Pixar has fared considerably better. Readers of our Motley Fool Stock Advisor newsletter service know that Pixar's stock has nearly doubled since David Gardner recommended shares in the summer of 2003. Because David has advised subscribers to accept the new Disney shares -- a move I wholeheartedly agree with -- they now have the neat distinction of having a cost basis in Disney at a mere $14.74-per-share price.
That's good, but if Pixar lives up to its past potential, it may be just the beginning here. Ignore the cynical pundits who fear that Disney overpaid for Pixar. Their opinions are the only worthless things here.
Longtime Fool contributor Rick Munarriz is still a kid at heart, smitten by the right kind of animation. He owns shares in Disney.DreamWorks Animation is also a Stock Advisor pick. The Fool has adisclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.