With shares of Pixar (NASDAQ:PIXR) dipping yesterday after a Barron's column waxed pessimistic on the animation studio over the weekend, maybe now is the time to look under the hood of the company whose Cars release will be the final flick in its partnership with Disney (NYSE:DIS).
There are no fishbones about it. Pixar and Disney failed to hash out a simple distribution agreement by which Pixar would finance and own its releases and Disney would act as distributor, because each wanted more out of the relationship.
Pixar obviously wanted meatier stakes in its next two projects, as well as a little more control over its past creations. There was plenty of room for both parties to come together and extend the partnership while yielding power and percentages to Pixar.
Yes, the breakdown does cap Pixar's earnings potential through its next two releases. There was always the near-term fiscal upside that a new deal with Disney could have improved Pixar's bottom line over the next couple of years. Barron's is right in singling out that a Disney-less future means that Mickey Mouse is unlikely to budge during the final stages of their lame "Donald" duck tenure.
But how can you not be excited about Pixar's future? After all, it was Pixar's fat margins and money-making record that made it a popular Motley Fool Stock Advisor stock recommendation.
And can you blame Pixar for moving on? This was a company creating a quality product but taking in less than half the proceeds. When Disney CFO Tom Staggs announced that Pixar's demands were unreasonable because it would have cost Disney "hundreds of millions of dollars" that it was entitled to, how can you not do the math and see how Pixar will have the last laugh if it laughs alone? Now, it not only has the right to earn more than twice as much as it has in the past, but it also has the flexibility to call its own shots and ramp up its production schedule.
Of course, the concerns are not lost on me. Pixar will have to bankroll its future releases. Pixar had a good thing going with Disney. So what? Unlike most debt-laden movie studios, Pixar sports an immaculate balance sheet with $517 million in cash -- and growing. Financing won't be a problem.
And will it really miss Disney's distribution? Over the past six years, how many times has an in-house Disney feature been the year's top grossing animated release? Once, with Dinosaur in 2000. That ties Disney with Dreamworks (Shrek in 2001) and Fox (NYSE:FOX) (Ice Age in 2002). Pixar has owned the other three years.
Even if you're not much for conference calls, you might want to check out Pixar's when it reports tomorrow afternoon. One thing's for sure -- it's going to be animated.
Rick is a fan of both Disney and Pixar -- and owns shares in both. Will Pixar make more or less money off its 2006 theatrical release? Why do you think the companies broke off their negotiations? All this and more -- in the Pixar discussion board. Only on Fool.com.
