Pixar Exceeds Expectations

Pixar reported first-quarter profits last night that easily trounced estimates. The company also raised projections for the current year and expects to earn between $0.40 and $0.55 per share. Next week, Pixar's closest competition releases its newest big computer-animated film. It will be interesting to see how the animation landscape will change in the near future.

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By Paul Larson (TMF Parlay)
May 11, 2001

Looks like Pixar (Nasdaq: PIXR) did it yet again. The leading computer animation company reported first-quarter results that far exceeded Wall Street's expectations. Pixar was expected to earn $0.12 per share in the quarter, and the company came in with profits of $0.16 per share.

Revenue at the company totaled a scant $16.2 million during the first quarter, well below the $61.0 million it gathered last year. This decline in revenue was fully expected since it has been a year and a half since the company's last theatrical release, Toy Story 2. Revenue was primarily comprised of royalties from pay-per-view and DVD sales of Pixar's three-film portfolio.

The company also again raised forward profit projections for the full year. Pixar now expects to earn between $0.40 and $0.55 per share for the current fiscal year, up from a previous estimated range of $0.30 to $0.50.  Though the company's top-line sales are extremely " lumpy" due to the periodic nature of its movies, Pixar has managed to remain profitable in each and every year since coming public days after Toy Story's debut in 1995.

Competition on the horizon
Next week, privately held Dreamworks will make yet another frontal assault on the animated movie scene that Disney (NYSE: DIS) and partner Pixar have dominated over the past decade. The computer animated Shrek will be released into theaters a week from today, and the movie will give an excellent glimpse into the health of Pixar's closest competition. (Sony's (NYSE: SNE) video game-inspired Final Fantasy is due this summer.)

Shrek was created by Pacific Data Images (PDI), majority owned by Dreamworks and the same company that did 1998's Antz. Though Pixar's similarly sub-grass-level A Bug's Life solidly trounced Antz both at the box office and in ancillary merchandising deals, Dreamworks appears to be on the rise in the animation market. Beyond now owning most of PDI, Dreamworks has a five-picture deal with Aardman Animation, creators of the stop-motion features Chicken Run and the cult classic Wallace & Grommit series. Dreamworks has the capital, the talent and the strong will to take Disney on.

Meanwhile, the problems at Disney's internal animation studios have been well-documented with nary a blockbuster over the last half dozen years and layoffs within the company's once-proud animation business expected. Pixar has a five-movie (not counting sequels) deal with the mouse. The company is producing Monsters, Inc. for a fall release and Finding Nemo will hit theaters 18 months later: Following that, Pixar may open negotiations with other companies but will still owe Disney two additional films. It will certainly be interesting to see if, and at what terms, Pixar renews with its current partner.

Of course, there is the possibility of an outright buyout from Disney. Rumors of such a deal have swirled for years. If such a deal were to occur, it would not happen without the approval of Apple's (Nasdaq: AAPL) Steve Jobs, since Jobs owns over 60% of Pixar's stock.

Either way, Pixar shareholders have to wait another six months until Monsters, Inc. hits the theaters. Revenue and profits will only trickle in over the next three quarters until, assuming Monsters is a hit, the floodgates are opened again early next year. Meanwhile, the market for computer-animated films will continue to be in a great deal of flux.

Paul Larson loves animated flicks and owns shares in Pixar. You can see the rest of Paul's stock holdings online. The Motley Fool is investors writing for investors.