shares pulled back Thursday as Wall Street continued to await news of a rumored deal.
Shares in Steve Jobs' cartoon juggernaut fell 3% in midday trading, partly reversing their sharp rise late Wednesday amid talk of a tie-up with partner
. Credit Suisse First Boston analyst William Drewry helped to douse that fire with a Thursday morning downgrade based mostly on the stock's heady valuation.
Pixar had risen 8% in the last hour of trading Wednesday as investors heeded an unconfirmed rumor that Disney would either buy the company outright or renew a lucrative distribution deal on favorable terms. Disney, which had fallen 2% late Wednesday amid the merger rumors, recovered Thursday morning to trade up 2%. The companies haven't had anything to say on the subject so far.
Pixar, the producer of
, has a perfect record of producing hit releases. But its crucial distribution agreement with Disney comes to an end after the release of its next major enterprise,
, scheduled for release this spring.
Investors are waiting with bated breath to see whether the arrangement can be salvaged. Pixar chief Steve Jobs and former Disney honcho Michael Eisner had a contentious relationship. But while a renewed deal seemed unlikely in the past, signals from new Disney chief Robert Iger and Jobs recently suggest that there is a better relationship and that a deal may be in the works.
Jobs said last year that he wanted to find a new distribution partner by the end of last year, adding to speculation that a deal was imminent. Further fueling Wednesday's Pixar feeding frenzy was Disney's remark earlier this week that it would back Jobs' other focal product, the
video iPod, with further content from its ABC and ESPN network stables.
Drewry, who downgraded Pixar to neutral from outperform but maintained his target price of $55, cites Pixar's recent surge for his pullback. "Pixar has had a major run recently. Since Oct. 7, the stock has increased 31%," outperforming the S&P by 24 points, he writes. "The stock price is now anticipating not only excellent fundamentals, but possibly a takeout as well."
On the subject of an announcement of a new distribution deal with Disney, Drewry says it is "overdue." Drewry believes a new deal would be favorable to Pixar with a distribution fee in the 8% industry-standard range, but that the new deal is already fully discounted in the stock price.
On Thursday, Pixar slid $1.77 to $56.39 and Disney rose 58 cents to $24.57.