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Cartoon showdown
Shares of Pixar and DreamWorks have done well lately but analysts don't see a happy ending for both.
October 10, 2005: 1:06 PM EDT
By Paul R. La Monica, CNN/Money senior writer
Not cursed at the box office: DreamWorks Animation's
Not cursed at the box office: DreamWorks Animation's "Wallace & Gromit: The Curse of the Were-Rabbit " grossed more than $16 million in its debut weekend.
Animation nation: Shares of Pixar and DreamWorks have enjoyed a nice run during the past few months.
Animation nation: Shares of Pixar and DreamWorks have enjoyed a nice run during the past few months.
Photo GallerylaunchSee more photos

NEW YORK (CNN/Money) Investors in Pixar and DreamWorks must feel like they've been characters in the companies' hit cartoons.

Like Nemo and Shrek, shareholders of the two animated studios each have had to overcome a fair share of adversity.

The two companies were forced to lower earnings forecasts earlier this year after shipping too many DVD copies of their latest blockbusters "Shrek 2" for DreamWorks and "The Incredibles" for Pixar.

Shares of both companies plunged during the summer.

But there has been triumph as well. Since reporting second-quarter results in August, shares of Pixar (Research) and DreamWorks Animation (Research) are both up more than 15 percent.

Analysts said that part of the reason for the recovery is that pessimism about the company's outlook was overdone. But there has been some additional good news too.

DreamWorks' claymation movie, "Wallace & Gromit: The Curse of the Were-Rabbit," was the box-office champ this past weekend, grossing more than $16 million. The film, about a cheese-obsessed British inventor and his faithful (and more intelligent) canine companion, beat out new flicks starring silver-screen superstars Cameron Diaz and Al Pacino.

And for Pixar, hopes are increasing that the company will soon announce a new distribution deal with partner Walt Disney (Research).

Under their current deal, Disney pays for marketing and distribution of Pixar films, and after those costs are covered, the two companies share profits from film and merchandise. The deal ends with the release of Pixar's next new movie, "Cars", in June of next year.

Negotiations for a renewal had broken off. But many analysts believe that new Disney CEO Robert Iger, who replaced Michael Eisner, will be able to make nice with Pixar's chief (and Apple (Research) head) Steve Jobs, who reportedly clashed with Eisner.

DVD concerns linger for DreamWorks

Still, will there be a Hollywood happy ending for shareholders of both companies? Analysts are more willing to bet on Pixar than on DreamWorks.

Marla Backer, an analyst with Soleil Research Associates, said that despite the favorable debut for "Wallace & Gromit," it will be difficult for the movie to have a big impact on profits this year since DreamWorks has said it will need to gross $170 million worldwide to break-even.

With that in mind, the company is not likely to reap the rewards from the movie until next year, when the DVD comes out.

What's more, DreamWorks will face tough comparisons in the fourth quarter of this year because of last year's hit "Shark Tale," which came out last October and grossed $160.9 million in the United States and $363.5 million worldwide.

"Nobody expects 'Wallace & Gromit' to earn the money that 'Shark Tale' did," said Jeffrey Logsdon, an analyst with Harris Nesbitt.

To be sure, DreamWorks could see a boost in the fourth quarter from the DVD release of "Madagascar," which was a bigger-than-expected hit. But Backer isn't factoring too much for that, given DreamWorks' earlier DVD stumbles.

Pixar does not have a DVD release planned for the holidays.

Betting on Pixar's better track record

Backer said that one problem for DreamWorks is that the early take on next year's movies is that they look "cute but not spectacular." Those films include "Over the Hedge," due out in the summer, and "Flushed Away," scheduled for a fall release.

Pixar, meanwhile, is expected to have another huge hit with "Cars," which features the voices of Paul Newman and Owen Wilson.

Backer said that there may not be any real catalysts to move DreamWorks substantially higher until 2007, when "Shrek 3" and the eagerly anticipated "Bee Movie," written by comedian Jerry Seinfeld, are due out.

Logsdon agreed that Pixar is probably in better shape next year because of "Cars." He added that the company's expected announcement in the near future about what it is working on beyond "Cars" should also be a boost for the company.

"Within the next six to eight weeks, Pixar should detail its next three or four films and that type of news typically has been beneficial for the stock," he said.

Finally, there's the Disney issue. At this point, many analysts said they would be surprised if Pixar and Disney did not extend their deal past next year's release of "Cars." Still, because of the DVD hiccup with "The Incredibles," some think that a Disney agreement is not yet factored into the stock price.

"There's a good chance Pixar will hook up with Disney again and that would give a lift to the stock," said Donald Baxter, manager of the Eagle Growth Shares fund, which owns Pixar.

Baxter added that he's owned Pixar for several years and is willing to hold on to it because of "the quality of the product, popularity and obvious profitability of its programming." He does not own DreamWorks, which went public last year.

For a look at more media and entertainment stocks, click here.

Boo! Why have horror movies been box office hits? Click here.

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking relationships with the companies.  Top of page

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