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Pixar stock stuck in predictable plot

The only thing more reliable than a Pixar Animation Studios hit has been the company's stock. For growth investors, that's not necessarily a good thing.

    The only thing more reliable than a Pixar Animation Studios hit has been the company's stock. For Wall Street, that's not necessarily a good thing.

    Pixar shares have spent most of the past four years trapped in a trading range between $30 and $45. Wall Street's behavior regarding Pixar has been consistent with every movie release: Just as Apple Computer traders load up when they expect a new computer to be unveiled--such as during the Macworld Expo--and then sell, Pixar shareholders follow a similar pattern when a new movie is announced.

    Maybe the predictable stock behavior of Pixar and Apple is some kind of Steve Jobs factor. While Jobs gets a lot of attention as Apple CEO, he also runs Pixar, which is expected to report fourth-quarter earnings of 17 cents a share, according to First Call.

    Pixar shares jump in the spring when trailers start appearing for the company's next movie. The stock drifts in the summer as the initial hype wears off. Then it's one more buying surge in weeks leading up to the studio's traditional November release. Shares are sold as soon as the film hits theaters.

    How predictable does the Pixar cycle get? At least one analyst, Prudential Securities' Katherine Styponias, downgraded Pixar immediately after "Monsters Inc." opened to a monster weekend of $63 million. Pixar's stock price has fallen 14 percent since Oct. 26.

    The recent end of the holiday season--the prime domestic box office period for the company's films--just ended, so it's a good time to look back at Pixar.

    "Monsters Inc." opened to rave reviews and generated more than $225 million of U.S. ticket sales in just a month and a half, outpacing all published forecasts. Morgan Stanley, for instance, this month raised its global estimate of the movie's box office total to $466 million from $380 million originally.

    How much Pixar ultimately will realize from "Monsters Inc." is an open question, but you can safely say that the company's coffers will grow substantially this year as it recognizes ticket (and product licensing) revenue from "Monsters Inc." Pixar's contract with Walt Disney guarantees Pixar half the money from ticket sales, after subtracting the cut for theaters and distributors, as well as 12.5 percent for Disney's own distribution costs.

    It's another score for a movie studio that has hit nothing but home runs since making its feature-length movie debut with "Toy Story" in 1996.

    Shake it up
    Although no one can complain about the hit movies, company observers are saying Pixar needs more of them.

    Many believe Pixar's stock won't grow beyond its trading range until the company increases its reservoir of movies and other digital content to produce steady revenue each quarter--instead of seeing revenue spike with new movie releases and then tumble once the latest film runs out of steam.

    "They're going to have to establish a content library," said Peter Mirsky, analyst with SG Cowen Securities. "It's going to be at least a couple of years."

    Pixar's long-term goal is to release at least one movie a year--an ambitious aim considering the time and effort needed to make animated movies. The company's next film, "Finding Nemo," is scheduled for 2003. Besides the obvious benefit of increasing revenue by releasing films more frequently, a large bank of films means more chances for sales of videos, books, toys, TV spin-offs and other products in other quarters, between new movies.

    Until then, Wall Street will continue to treat Pixar as a traders' game revolving around the next movie release, analysts believe. Among eight analysts polled by First Call, six maintain the equivalent of a "hold" rating on Pixar.

    No one believes Pixar is going to stumble anytime soon in movies. Although the "gee whiz" factor of 3D animation may be fading (the past summer's "Final Fantasy" movie, for instance, did far worse than producers expected for an action film with cutting-edge digital effects), there's no reason to doubt Pixar's ability to make entertaining movies, Mirsky said.

    "We were kind of surprised at how well 'Monsters Inc.' held up after 'Harry Potter' came out," Mirsky said. "But people care about the story as much as the animation."

    Pixar just has to produce those stories more often.