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Michael Burry

Pixar Animation Studios
NASDAQ:PIXR
2000-2005 Industry: Movies
Category: Value

Context
Pixar is fresh off it's first 3 releases, "A Bug's Life", "Toy Story", and "Toy Story 2".

Why the Company was Mispriced
Pixar Animation Studios is a stock sitting where no one can get it.
The problem? Pixar's next feature will not be released until 15 months, a full 2 years after the last, "Toy Story 2".
The next year and a half will include the driest quarters Pixar will ever see.
Even if analysts or PMs like the long-term story, the Wall Street Marketing Machine will not allow them to buy it.
For Wall Street, this is a timeliness issue.

Alternative View
No matter that the first 3 releases established Pixar as a 1.000 batter.
No matter that Pixar promises at least 1 release per year from 2001 onwards
No matter that has CEO Steve Jobs and CFO Ann Mather, and a growing talent pool with the likes of animation guru Brad Bird.
As Burry discussed, for a growth company, only a tiny fractice of the intrinsic value results from the next 3 years.
Heck, only a fraction of today's intrinsic value depends on the next 10 years.
Will Pixar be around and making money 10 years from now... and beyond? Certainly.
Pixar is generating cash at a strong pace, cash on hand is 214m.
Pixar is guiding earnings of $1.30, but we will likely see it exceeding $1.35.
Pixar trades 21x accounting earnings, 14x FCF, on a EV basis.
Earnings will fall next year, the stock is heavily shorted in anticipation, and it's not like me to say this, but getting into the quarterly accounting minutiae here is a bit counterproductive.
Pixar's full product life cycle, managed correctly, can be extremely long.
As Pixar releases more films, more life cycles are put into play, overlapping and creating smoother larger earnings.

More importantly in 2004, Pixar will release it's final film under Disney's distribution agreement.
This agreement is onerous, which Pixar had agreed to when it had much less success under its belt.
Currently, Pixar only gets 50% of the gross revenue after Disney deducts distribution and marketing.
Disney's claim on revenue is so much that Pixar cannot make profit on the entire domestic box office.
Pixar is already of sufficient strength to extract a more lucrative deal, and after a few more blockbusters, Pixar will be in a position to restructure a new agreement with tremendous implications of Pixar's bottom line.
Any additional concessions from Disney should flow nearly untouched to the bottom line.
For example, a 20% profit after distribution costs should boost Pixar's operating income by 40%.
Knowing this, we can estimate that in 2005, we should see a big boost in Pixar's income.
Pixar's earnings over the next 10 years alone can approximate $30-40/share in present value.
The risk is that the films flop. If this were Fox, I'd worry. I'll buy shares at 33.75.

Result
Pixar's movies for the next 10 years were, "Monsters Inc", "Finding Nemo", "The Incredibles", "Cars", "Ratatouille", "WALL-E", and "Up". Talk about a winner.
Pixar's stock split in 2005, doubling it's outstanding shares.
Disney acquired Pixar for $60/sh in 2006, resulting in a 4x return (25% CAGR).