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A PLAY ON PIXAR?Even if you're kids fall in love with Flik and his insect pals in A Bug's Life, you may want to think twice before rushing off to buy shares of Pixar Animation Studios. For while Pixar's arrangement with Disney gives it a sweet deal -- an equal share of the profits, after Disney recoups its marketing costs and takes a 12.5% distribution fee -- Pixar shares may not have so much upside for investors in the near term. That's because Wall Street has already bid Pixar shares up to almost $50, from the low $20s a year ago, on expectations that A Bug's Life and two more Pixar films in the hopper will be hits. Indeed, even bullish analysts such as Hambrecht & Quist's Paul W. Noglows are targeting a $50 share price. While there is upside if Bugs blows the doors off as did Pixar's 1995 blockbuster Toy Story, he notes that the company is already trading at 30 times expected 1999 revenues (see chart, "Thriller"). In other words, the same advantages that have Pixar sitting pretty -- namely, the full backing of Disney's mighty marketing and merchandising machine -- have also created a very high bar for Pixar. Says Merrill Lynch analyst Jessica Reif Cohen: "Every movie has to be perfect to justify the current valuation. They cannot fail." CLASSY NEIGHBORHOOD. That said, if you're willing to gamble on Pixar's artistic abilities and you can hold on, the studio is probably a good bet. For if Steve Jobs and crew establish the Pixar brand in the same neighborhood with Disney, Spielberg, and Lucas, this 420-person company will have lots of lucrative options -- like selling out to Disney or doing its own distribution deals, and thereby keeping a higher percentage of the profits. Those are big, long-term ifs, but they might be worth the wait -- especially since Disney needs Pixar to succeed for its own reasons. Says Noglows: "Disney needs Pixar right now almost as much as Pixar needs Disney. Disney's last few films haven't been major big smashes. So in terms of animation, Pixar may be Disney's next best hope."
By Peter Burrows in San Mateo, Calif. RELATED ITEMS
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Updated Nov. 16, 1998 by bwwebmaster
Copyright 1998, by The McGraw-Hill Companies Inc. All rights reserved.
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