Pixar Picture Still Hazy

Investors await news of a Disney tie-up, but so far none is forthcoming.
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Pixar

(PIXR)

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

Disney

(DIS) - Get Report

. 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

Finding Nemo

and

The Incredibles

, 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,

Cars

, 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

Apple

(AAPL) - Get Report

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.