Dog Food for Thought at P&G; the Pixar Roller-Coaster

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Procter & Gamble (PG)

Jim: Up first today is, well, a corporate institution, right, Mike? Sometimes you wonder how we would all live without Procter & Gamble, given all the consumer goods it makes. Which, by the way, generate $38 billion in annual sales.

Mike: Yeah, sometimes I think I have an all-Procter & Gamble medicine chest in my house. Should we name a couple of their products?

Jim: Tide and Cheer detergents.

Mike: Crest toothpaste, and Ivory and Zest soaps.

Jim: Head & Shoulders shampoo, Pampers baby diapers, Folger's coffee.

Mike: Pringles, Jif peanut butter.

Jim: Noxzema and Cover Girl cosmetics.

Mike: Stop! You get the idea. P&G; is a great company and is always there when you need it. And now, if you own a dog, it'll be there for you too.

Jim: You're referring to its recent plan to buy Iams, the pet-food company, which we'll get to in a moment. First, though, P&G--like; so many others in the food and consumer-products fields--has had some rough sledding in the 1990s trying to find consistent growth.

Mike: Like Coca-Cola, or Gillette.

Jim: Especially Gillette.

Mike: Don't remind me.

Jim: In P&G;'s case, it entered the 1990s as a sleepy, bloated giant with dominant shares in many of its markets. Since them, it's undergone two enormous restructurings.

Mike: So now it's a sleepy svelte giant.

Jim: You're probably right. Meantime, these restructurings have meant laying off thousands of people and closing dozens of plants, to make P&G; more streamlined.

Mike: Yes, when a company like Procter & Gamble restructures, there's blood all over the tarmac.

Jim: It's notable, though, that the first restructuring was aimed at helping P&G; cut prices to stave off what was becoming a wave of cheaper, private-label brands that the supermarkets were introducing. Now, the latest one is intended to make P&G; more nimble in rolling out new products that carry higher prices and therefore higher profit margins. Whether it will work is anyone's guess.

Mike: Fine, but the real problem at P&G; is growing the top line, meaning sales, or the top line you see in an annual report. The company did announce last week that sales rose 4.3% in its most recent fiscal quarter from a year earlier, which is an improvement for P&G.; But there's a limit to what you can do to sell more Tide. I mean, the 15th version of the "new and improved" Tide only goes so far.

Jim: And the same thing goes for everything P&G; sells, all of which face enormous competition.

Mike: Exactly. So Procter & Gamble also is doing something new itself, and that's buying Iams, a leading marketer of premium pet food. Now, this is going to be a very interesting challenge, and a signpost for the way P&G;'s new chief executive, a Dutchman named Durk Jager, is going to function.

Jim: Well, Iams is costing the company $2 billion, and it's the biggest acquisition in P&G;'s long history.

Mike: It is a big move, all right, but Iams is not a major pet-food label in the broad sense. So P&G; has to figure out how to move Iams from its regular outlets, like veterinarians' offices and specialty stores, into the mass-market retailers. And that begs the question whether Iams will continue selling as well.

Jim: As for P&G;'s stock--a component of the Dow Jones industrial average, by the way--it's done pretty well in the '90s despite all the turmoil. It basically kept pace with the bellwether Standard & Poor's 500 index for much of the time, and it's gained about 21% in the last 12 months to above $105 a share.

Mike: My take? I see the stock going into a flat period.

Jim: So you wouldn't buy it?

Mike: No.

Jim: Well, it bothers me that the stock sells for a fairly pricey 32 times P&G;'s expected earnings per share for its fiscal year ending next June.

Mike: Right, for a company's whose sales have been growing just about 3% a year, or less than inflation.

Jim: I know. But I'd still buy the stock as a long-term investment.

Mike: You sound more like a venture capitalist every time we chat.

Jim: Despite its upheaval and its fierce competition, P&G; is still a leading player all over the globe. Its stock also has a long-term history of steady gains in good times and bad, at least as a market performer. And I think P&G; still has a few tricks up its sleeve, the Iams deal being only the latest one. So I'd still buy the stock as a long-term holding, though you might not make any money overnight.

Mike: Your call. But if you take a bath with Procter & Gamble, at least they've got plenty of products for cleaning up your mess.

Pixar Animation Studios (PIXR)

Mike: I want to say right off, Jim, that I would be delighted to spend $7.50 for a ticket to any movie Pixar puts out, and to spend $20 or $25 on any videotape of those movies. This is the studio, of course, that's produced two animated blockbusters.

Jim: "Toy Story" and "A Bug's Life."

Mike: And look out this Thanksgiving, because Pixar's next movie is coming: "Toy Story II." And I don't think anyone can dispute that it's expected to be a blockbuster too.

Jim: OK, so now you're willing to spend $30 or so to see a Pixar movie and to buy its video. But the question is whether you're willing to spend around $40 to buy its stock.

Mike: No, I'm not.

Jim: Me neither, but you've got the floor.

Mike: Let's take things step by step. First, this is an entertainment company but not a diversified one.

Jim: You know its history well, so enlighten us, even though it means suffering through yet another plug for your book.

Mike: Well, Pixar was actually founded by a number of alumni of my favorite place: Xerox PARC, the Palo Alto Research Center. Yet at the time, back in the '70s, they were pariahs at PARC for being a little too advanced because they liked to think in digital color, which PARC's computer designers thought would be too difficult.

Jim: So where did they go?

Mike: They ended up at the New York Institute of Technology and then at George Lucas' film studio. Then, as I understand it, Lucas was getting a divorce and needed to raise money, so he spun off the Lucas animation operation into Pixar.

Jim: And then how did Apple Computer's chief, Steve Jobs, end up running Pixar too?

Mike: Jobs actually put up some of the money to get Pixar on its feet as a stand-alone company, somewhat like a venture capitalist. But ultimately he helped develop Pixar into the entertainment power it is today.

Jim: Now, after "Toy Story" came out in '95, Pixar really got a lift in '97 when it signed a five-picture deal with Walt Disney Co. That gave Pixar real staying power, Mike, at least as far as investors were concerned.

Mike: But there are some disquieting things about Pixar. First, Pixar is a one-man show--and I don't mean Steve Jobs.

Jim: Who do you mean?

Mike: John Lasseter, who directed the big three Pixar films so far and has been brilliant at it. Now, I'm sure Pixar has Lasseter tied down with golden chains and golden handcuffs. But if the guy were to disappear tomorrow, what would happen to this stock? There would be a real question as to whether Pixar would be able to keep turning out great pictures on a reliable basis.

Jim: Let's give Pixar its due for now, though. Last week, for instance, the company's third-quarter results blew away analysts' expectations, mainly because of strong video sales of "A Bug's Life," and that gave the stock a brief jump. Also, in the first nine months of this year, this company earned a whopping 41 cents per $1 of revenue. They know how to make a buck.

Mike: Fine, but if you look at a chart of Pixar's stock price, it's like a roller-coaster that seems to peak every time Pixar is about to release its latest movie. Then it heads back down.

Jim: Absolutely, and I can see we're reaching the same conclusion.

Mike: And guess what? We're seeing an upswing right now because of the upcoming "Toy Story II."

Jim: A tiny upswing, which gets to the heart of my problem with Pixar. In late '97 and early '98, this stock took off amid "Toy Story" and the Disney pact, and then dropped about as fast. And over the last 12 months--absent a new film release--the stock has just meandered and lost 18% of its value. So for a whole year you'd be further ahead if you'd just stashed your investment under a toy model of Buzz Lightyear.

Mike: Meanwhile, the S&P; 500 rose about 22% and the Russell 2000 index gained about 12%.

Jim: Yep. So it seems Pixar lacks consistency as a buy-and-hold investment. You could be a speculator, and try to time getting in and out of the stock as its movies come and go, but that's a dangerous game when the stock is selling for a princely 45 times its expected earnings per share for '99.

Mike: Look, this is a company that puts out a great product. It's full of extremely talented and brilliant scientists and artists and visionaries. It's run by a headline-grabbing executive--Jobs--and he's proven his skill at running two very difficult companies. But Pixar's stock is another matter.

Jim: It wouldn't surprise me if this stock jumps between now and Christmas, on the publicity of "Toy Story II." But then what? Pixar does have another movie planned for next year, "Monsters Inc.," but will investors again have to go months in between with nothing to show for their shares?

Mike: And you never really know when the magic is going to vanish from an entertainment producer. Not to take anything away from Lasseter and his team, but it's very hard to put blockbuster movies on an assembly line.

Write or e-mail with a stock you would like to see discussed in this column. Staff writer James Peltz (james.peltz@latimes .com) covers the markets and corporate financial trends. Staff writer Michael Hiltzik (michael.hiltzik@latimes .com) covers technology and entertainment and is the author of the new book "Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age." Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.


You can hear a preview of Peltz and Hiltzik's weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

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