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Pixar's coming attractions
Will Pixar forge a new deal with Disney? What's it working on after "Cars?" Investors want answers.
November 3, 2005: 12:56 PM EST
By Paul R. La Monica, CNN/Money senior writer

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If the sky doesn't fall on Disney's
If the sky doesn't fall on Disney's "Chicken Little," the House of Mouse could decide that it no longer needs Pixar.
That's "Incredible": After a summer slump, shares of Pixar have come roaring back on hopes of a new distribution deal.

NEW YORK (CNN/Money) Wall Street hates uncertainty. It's one of those investing aphorisms that you hear time and time again.

But if that adage is really true, you wouldn't know it by looking at Pixar.

Shares of the animated-movie production company have surged nearly 20 percent during the past month. Yet, it's hard to find a company with more question marks.

With Pixar (Research) set to report its latest financial results on Tuesday, here are some issues that fans of Nemo, Woody and Sully need to be thinking about.

Who will Pixar's next distribution partner be? Walt Disney? Most likely.

Talks between Disney and Pixar broke down in 2004. Their current distribution deal ends with the release of Pixar's next movie, "Cars."

According to the terms of that agreement, Disney pays for marketing and distribution of the films. After recovering those costs, Disney splits profits from the films and related merchandise equally with Pixar.

But now that Michael Eisner is no longer CEO of Disney (Research), there have been increased hopes that Disney and Pixar will kiss and make up.

Pixar CEO Steve Jobs, who also runs a little company called Apple (Research), is said to have a much better relationship with new Disney chief Bob Iger. During the company's second-quarter conference call in August, Jobs said he was talking to Iger about whether or not to forge a new deal.

There are already some promising signs. Last month, Disney agreed to allow some of the hit shows from its ABC television network to be available for purchase on Apple's iTunes site. That announcement sparked hopes that a new Disney-Pixar deal could be imminent.

Then again, Pixar could decide to go the George Lucas route and do mostly everything itself. That strategy could potentially be more profitable for Pixar but also a lot more risky.

In addition, Disney could decide that it doesn't need Pixar if its widely hyped computer-generated cartoon "Chicken Little" is a hit. "Chicken Little" comes out on Friday.

"Pixar and Disney are both waiting to see how 'Chicken Little' does. Although they've had negotiations that are ongoing, there probably isn't anything inked and talks will resume after this weekend," said Robert Routh, an analyst with Jefferies & Co.

There has been some chatter that Disney should flat-out buy Pixar. But Steve Lidberg, an analyst with Pacific Crest Securities, said this speculation is a "stretch" and that he doubts Jobs is willing to give up control of the company.

And some think that Pixar is limiting itself by not engaging in more serious discussions with other movie studios. Because of Pixar's spotless track record at the box office, other companies might be willing to give Pixar a bigger cut of profits.

"I hope Pixar doesn't do a deal with Disney," said Kevin Landis, president of Firsthand Capital Management, a mutual fund firm specializing in tech stocks that owns Pixar. "Pixar could get a better deal if they opened up the bidding."

What movies does Pixar have on tap after "Cars" rolls into theaters next June? Nobody knows.

Rumor has it that the company is working on something called "Ratatouille," a cartoon about a rodent living in a fancy Parisian restaurant.

In addition, Disney, which owns the rights to make sequels based on characters made in the movies that are part of the current distribution deal, is said to be considering making a "Toy Story 3" with or without Pixar. However, if Pixar and Disney renew their deal, it seems likely that Pixar would want to be involved in this movie.

The company did not return calls seeking comment about new movies. But Jobs did say the following about its future release schedule in August: "On or before our next conference call, we hope to announce our slate of upcoming films that we have green-lit for release, post-"Cars," and post- our current Disney deal. We're very excited about all of them."

So if he lives up to his promise and gives investors more details about new movies, then that could be a positive sign. But perhaps more importantly, investors will be eager to hear about the scheduling of these releases.

One knock on Pixar has been that it has not been prolific as some would like. It has released only six movies since 1995. But if the company promises that its next three movies will be released in 2007, 2008 and 2009, that would probably please Wall Street.

"If we continue to see them shrink the window between film releases, that would be a major event. Pixar has talked about doing one a year," said Lidberg.

What about DVDs? Pixar's stock tanked during the summer after the company warned in June that second-quarter profits would be lower than expected because of increased reserves to account for a higher than anticipated level of returns from retailers of DVD copies of "The Incredibles."

That led to some concerns that demand for animated movies on DVD isn't as strong as originally forecast. Pixar's top rival, DreamWorks Animation (Research), also suffered from greater than expected returns of "Shrek 2."

But shares of Pixar have recouped most of this summer's losses due to hopes that the DVD issue was a one-time blip. So it will be interesting to see if Pixar has truly rebounded.

Analysts expect Pixar to report revenue of $30.6 million in the third quarter and earnings of 11 cents a share. For the fourth quarter, Wall Street expects sales of $45.1 million and profits of 15 cents a share.

If Pixar does not meet these targets because of continued DVD problems, that could be a significant blow to the company.

After all, Pixar is the subject of class-action lawsuits filed on behalf of shareholders who were miffed at how the company handled its second-quarter earnings warning. The Securities and Exchange Commission has also requested information regarding accounting for DVD returns.

With all this in mind, can Pixar's stock continue to head higher? Probably. Pixar's movies, so far, have lived up to all of the buzz. But it would help if the company addresses these questions in its next conference call.

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

Pixar shorts are available for the video iPod. 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.

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Written by: Paul R. La Monica
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