Thanks for your post. It was very informative.
I held my nose last week and bought the stock against my better judgement. There are some important reasons why the stock has sold down so aggessively. Two I can name include :
1. The July disclosure in the 10Q filing that Disney’s “marketing and distribution costs” for Toy Story are higher than originally anticipated which will have an adverse impact on PIXR’s 1997 results ( this was a pre-announcement of a bad 1997); and
2. The fact that almost no public shareholder has a gain in the stock as we approach tax loss sellin season (circa December).
If you look at page 11 of PIXR’s 10Q filing for June, it says “Pixar further believes that these two factors, particularly the higher level of Disney’s marketing and distribution costs, will have a material adverse impact on Pixar’s compensation from Toy Story revenues and results of operations for 1997.” In English, this means that Disney is reducing PIXR’s share of Toy Story.
While PIXR’s financial statements don’t directly disclose internal estimates of the total revenue expected from Toy Story, a rough estimate of this amount can be calculated from other information, namely, the 2nd Qtr. revenue from the movie and the rate at which they amortize “capitalized film production costs.” These costs are required to be amortized in the following proportion:
(Period Revenue from Toy Story)/(Tot.Expected Revenues from Toy Story)
In the second quarter, $414,000 of a total of $3,200,000 of “capitalized film production costs” was amortized, or 12.94% of the total, and PIXR received $5,000,000 in period revenue from the movie. Using this relationship, an estimate of the total expected revenue from Toy Story is:
$5,000,000 / 12.94% = $38,600,000
If I’m right, this means that PIXR expects to recognize about $34,000,000 more from the movie over the next 2+ years. It is unclear whether CD-ROM revenues are built into this number so it could be higher.
Now if you look at 2nd Qtr. income results, it works out that PIXR’s expenses are virtually covered by software and licence revenue together with its interest income. Therefore, a good estimate of PIXR’s two year going forward pre-tax income (they have about $29 MM in NOLs) is $34,000,000. That is not hot.
So why did I buy the stock? I bought for the following reasons:
1. The stock look’s “sold out” on a chart (it did pop today, however). This is probably not a good reason to buy;
2. I think that PIXR will accerate the release of the second movie to the end of 1997;
3. I also think that PIXR may renegotiate the contract with Disney; and
4. Absent a move up in the price, Steve Jobs or Disney will buy out the public shareholders. Job’s could make a $15 MM profit on the IPO if he tendered for $18/share.
I’ll provide a basis for these four items in a later post when I get the time to type up the pages. I hope I’m right about this.
David |
