Foolish Forecast: Screening Pixar

Analysts' digits are twitching to give animated filmmaker Pixar (NASDAQ:PIXR) two very big thumbs down when the Motley Fool Stock Advisor pick reports third-quarter earnings after the bell Tuesday afternoon. At last report, Wall Street firms were expecting the company to report a 31% decline in revenues against the year-ago quarter and a 42% drop in profits to just $0.11 per share.

Of course, the analysts do have reason for their pessimism. The memory of this company's June earnings warning remains fresh (as in a "fresh wound") in everyone's minds. On June 30, Pixar slashed earnings guidance by 33% for its second quarter of 2005, dropping estimates from $0.15 to just $0.10 based on lower-than-expected DVD sales. That the company succeeded in hitting its decimated profits target a month later won it brownie points from absolutely no one.

While Pixar didn't provide guidance in its Q2 earnings report, analysts decided to dial expectations back a notch on their own. Three months ago, they were expecting the company to report about $0.14 per share in tomorrow's report. Now, the consensus is the above-mentioned $0.11. Presumably, much of the pessimism arises from perceptions of a weakening in the DVD sales market; co-Stock Advisor recommendation DreamWorks Animation (NYSE:DWA), which reports on Thursday, has encountered similar problems with DVD sales and is expected to report only breakeven results.

Another issue dogging Pixar (and DreamWorks as well) is that by lowering earnings expectations and suffering the consequent stock-price decline, it dropped blood into the shark-infested sea of shareholder class-action lawsuits. Although I haven't seen a new lawsuit announced against DreamWorks for months, they're continuing to roll in at Pixar, pressuring the stock price with negative publicity and raising fears of real damage to the company in the form of legal costs and expenses to settle the lawsuits.

But to this Fool, analysts' fears of Pixar's demise seem overblown. Sure, revenues and profits are down -- but when a company's business model depends on producing films every 18 months, "lumpy" earnings are to be expected. With Pixar, it pays to take only a long-term view -- and specifically, a view no shorter than its next film, Cars, which is due out next summer and will perhaps be the last movie in its cooperation agreement with Disney (NYSE:DIS). Although 2005 may well end up being a lean year for Pixar, I suspect that analysts' predictions of Pixar earning less money next year than it earned in each of 2004 and 2003 will be proved wrong. Unfortunately, tomorrow's report won't tell whether I'm correct about that; you'll have to wait another year to be sure.

For more on the animated movie biz, read:

• Big Stakes for Chicken Little
• Claymation Tops the Charts
• Eyes on Eisner, Again
• 4 Stocks to Buy in 2006

Fool contributor Rich Smith does not own shares of any company named above.