Rewind four months
From a post I made to another board in mid-August:
My belief is that [the $ spread between PIXR and DWA] will only widen as time goes on. First, when Pixar announces that they have come to a new distribution agreement, either with Disney or some other distributor. If it's with Disney, it may include "Cars", which would significantly increase Pixar's earnings in 2006 as well as going forward.
One month from now, I think the spread may be much the same as it is now. Six months from now I would be surprised if the spread was less than $23, which would see PIXR at roughly double today's DWA share price. One year from now, DWA might finally start stirring due to high expectations for its summer 2007 film: "Shrek 3". I don't expect DWA to do much between now and then, honestly.
finance.messages.yahoo.com
Silly me, I was being conservative again. For the first month after I made my prediction, PIXR and DWA roughly maintained their diffferential, just as I thought they would. Six weeks after my prognostication, PIXR started climbing, just as I thought it would. Eleven weeks after mid-August and we have already exceeded the (six-month!) spread I thought we would see between DWA and PIXR, and PIXR is indeed trading at roughly twice the price as DWA. PIXR has risen about 19%, while DWA has risen less than 4%.
So what's changed? In fact, what's changed for Pixar since early July, when I bought back in, and to which the title of this post refers? Not much, really. At least nothing that wasn't fairly easily foreseen. True, Pixar is now selling several of its short features on the iTunes Music Store for $1.99 a pop, of which Apple gets to keep some, but it's otherwise free money for Pixar, maybe to the tune of a megabuck or two this quarter that Pixar wouldn't have seen otherwise. And Pixar and Disney (or anyone else) haven't announced a distribution deal yet. I would be surprised if both parties weren't waiting to see how Chicken Little does, and surprised if Chicken Little did particularly well. Shark Tale numbers still seem in order, probably at best ( finance.messages.yahoo.com ). How many people are going to want to see a funny 'toon about a chicken who thinks the sky is falling, after all? Some, sure, and Disney may get a certain surge of familes who want to see the first Disney all-CGI effort, but that seems like it'll be a short-lived novelty.
I would be surprised if Pixar and Disney didn't sign a distribution deal this year, frankly. If not, I expect that Pixar will sign a deal with someone else by March at the absolute latest. And I continue to expect that PIXR will rise in anticipation of a new Disney deal that'll be roughly twice as profitable to Pixar as the old one was.
PIXR's all-time high is $54.57, which it hit back in June. PIXR is at $52.81 now, with a bullet. My guess is that PIXR makes a run at those all-time highs in the very near future, then starts setting new highs. Why wouldn't it? Fer gosh sakes, PIXR's trailing P/E is reported as 37.35 ( finance.yahoo.com ) though I calculate 25.64 = $52.81 / $2.06 ttm EPS, and within the next two years, Pixar is going to start bringing in twice as much money. It could be next year, if the distribution deal is with Disney and includes Cars. Or it could be 2007, if the deal doesn't include Cars. Cut PIXR's P/E ratio in half to compensate for the doubled profits that Pixar should see (assuming its films continue to perform well, which is a tall order, but achievable considering that they will be summer releases for the foreseeable future, unlike five of its six previous films), and you're still looking at a no-brainer buy here, even if you didn't buy before PIXR gained 22% from where I bought it 4 mounts ago.
Add to that the other growth factor that Pixar will see kick in starting next year: film releases every 12 months instead of every 18 months. That's potentially a 50% gain over and above the doubled profitability from a more advantageous distribution deal.
Assuming that Pixar's films continue to perform at the levels we've seen them perform in the past (again, a tall order, but achievable), and I think it's not unreasonable that PIXR could triple from today's levels within (at most) nine more quarters, while still maintaining the same trailing P/E ratio we see right now. And there's room for upside from that ... if Cars sees box office and DVD/video sales like Finding Nemo did in 2003-04 rather than like what The Incredibles did in 2004-05, and the new distribution deal includes doubled Cars profits from the current deal, PIXR could see levels 4 or 5 times higher than they are now. Of course, the converse is also true, so for the moment I'm most comfortable in assuming that Cars will generate revenues in line with The Incredibles, Monsters, Inc., and Toy Story 2. If it gets more, it's just that much more gravy. The point for me is that today's levels probably represent a significant bargain from where PIXR will be going in the next couple years.
Next week's earnings report should be fun ... great holidays to all! |
