Since when did Disney's (NYSE: DIS) Pixar have a "kick me" sign digitally rendered on its hindquarters?
Analysts have been piling on, portraying Disney's buyout of Pixar as a successful exit strategy for Pixar with Disney left paying a heavy tab. The latest shot came from this week's Barron's, where the "sweet deal" for Pixar shareholders is skewered.
"Disney stock has appreciated, Pixar's latest movie, Cars, has proven disappointing at the box office and Pixar may have backdated stock options," the column claims.
Not so fast there, pork chop. You can't bash the most successful animation studio of our generation and expect to get away with it just because the company as a standalone publicly traded entity has been dusted under the pixie dust.
On the road again
Is Cars really that disappointing? Critics were only mildly impressed. Over at RottenTomatoes.com it became the first Pixar film to score lower than a 90% approval rate, but is pleasing 76% of the celluloid literati really a failure?
Moving on to the box office, grossing $242 million in domestic ticket sales is enough to make the film this year's second biggest producer. Only Disney's own Pirates of the Caribbean: Dead Man's Chest fared better with the popcorn munchers.
Disappointing? Pixar's seven films have averaged $243 million stateside. I won't sugarcoat the fact that earlier releases also came attached to lower ticket prices at the multiplex, but I refuse to define failure as a summer blockbuster that outdraws every single rival studio this year.
If you want to define disappointment, look no further than Disney's last computer-animated release. The Wild came out two months earlier and generated a paltry $37.4 million in domestic ticket sales.
This brings us to the point that Disney's stock has appreciated since both companies struck the deal, which was originally valued at $7.4 billion but these days is worth closer to $8.6 billion (before backing out the $1 billion in cash on Pixar's balance sheet). Does anyone really believe that Disney's shares would have inched higher this year if its flagship animation studio had just released its last co-produced picture with Pixar and was riding on the laurels of The Wild?
Pixar helped salvage Disney's brand in animation overnight. With the exception of Lilo & Stitch, most of Disney's inked handiwork has languished in recent years. Yes, Disney has been successful with its steady ESPN and resurgent ABC, but why can't we accept that a good chunk of Disney's gains since the deal was brokered has been due to the harmonious nature of Pixar's synergistic appeal?
The magic of Pixar
Media conglomerates like Viacom (NYSE: VIA) and Time Warner (NYSE: TWX) are trading lower this year. Disney has beaten analyst targets soundly since Bob Iger took over as CEO. That has clearly helped. However, walk into a Disney Store and play a game that I like to call CTPP: Count the Pixar Products. If you're not the mall-hopping type, just stay home next month and play CTHTOT, Count the Halloween Trick-or-Treaters, by tallying up the Lightning McQueens and Buzz Lightyears that hit you up for some candy.
Head out to a Disney theme park, and most of the new attraction construction taking place at the moment is for new rides themed after Pixar characters. Yes, Disney could have been doing this anyway. It had the right to the characters even if it had to split the proceeds with Pixar, but seeing how much Disney has been able to milk of Pixar's first six franchises has to leave one wondering what Disney will be capable of now that it owns all of the future franchises as well.
Cars wasn't a disappointment. Given the subject matter, it was going to be a hard sell for young girls. I would be more worried if I were DreamWorks Animation (NYSE: DWA), ringing up $155 million in domestic box office sales for Over the Hedge with its emphasis on more dual-gender friendly animals as lead characters.
As for the potential of options backdating, it's hard to put a price on something we don't know a whole lot about. This is a web that has snagged blue-chip tech stocks like Intuit (Nasdaq: INTU), CNET (Nasdaq: CNET), and Apple Computer (Nasdaq: AAPL), and we still don't know all of the implications. My hunch is that even if Pixar's hands are dirty here, history will see it as little more than a rounding error unless the implications are wider than they appear.
Be kind when you rewind Pixar
The Barron's article closes by pointing out how Steve Jobs "netted over $3.5 billion from the sale, swapping his illiquid Pixar shares for liquid Disney stock -- another brilliant move."
It's a fair point in terms of liquidity, but since when has Jobs been panhandling in Cupertino? He doesn't seem to be in a rush to unload his Disney stake, and that should tell you something.
We can always argue over who needed who the most. Did Pixar need Disney more than Disney needed Pixar? I don't think so; I also don't believe that Pixar saved Disney. It simply turned some of Disney's weaknesses into its strengths. So why quibble over who needed whom? Shareholders are glad to see the pairing. It's evident in the higher share price. It will be evident as Pixar's proven success on this side of the millennium helps breathe new life into a Disney that worked a lot better on the other side of the millennium.
If I'm right, Disney didn't overpay for Pixar. It got a Buzz bin bargain.
In the summer of 2003, David Gardner recommended shares of Pixar to Motley Fool Stock Advisor newsletter subscribers. The shares have nearly doubled since then and David continues to recommend them, now as part of Disney. Time Warner and DreamWorks Animation are also picks in that newsletter, while CNET Networks is a
Rule Breakers
selection and Intuit is an
Inside Value
pick.
Longtime Fool contributor Rick Munarriz is still a kid at heart, smitten with the right kind of animation. He owns shares in Disney. He is also part of the
Rule Breakers
newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
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