IMAX: Welcome Back to the Land of the Viable

Ever since I saw the first preview for the Transformers movie sequel months ago, I was running an over/under in my mind for how low the Metacritic score would be…50? No, that would be way too high. This movie was pure drivel. I settled in on 40, figuring that the USA Today or TV Guide would give it a 75 to boost the average. I was pretty close, with the movie registering a 36 out of 100. Oh, did I mention that the movie made $112 million over the weekend, and $200m in the first 5 days?!!

That’s ok, I stopped being surprised at the broad tastes of America a long time ago. My point for mentioning this is that the IMAX release pulled in $14.4 million on 169 of their mega-screens (not to be confused with Megatrons). This was nearly twice as much as the previous best IMAX release, one of the Harry Potter films last year (I can’t keep ‘em straight anymore) at $7.3 million.

IMAX Corporation (IMAX) has emerged like the proverbial Phoenix (that’s what is was! - Harry Potter and the something Phoenix) to find itself a viable entity again. And I’ve been waiting for this moment for the better part of a decade.

I wrote a piece of commentary back in December of 2007 for Investopedia (you can read it here) in which I outlined my case for why, with a little less interference from horrible management, this company was worth at least $500-$600m on its brand alone. Back then the company was just announcing a broad effort to convert to digital projection screens, which would serve to massively lower the ongoing cost structure.

As with any company who had been managed into pseudo-bankruptcy, cheated on their SEC reports, and put itself up for sale (only to realize nobody wanted to bid), I avoided the stock like the plague.

It may finally be time to take a hard look at the stock, despite the fact that shares have run over 200% in the past 6 months:

Positive Catalysts Could Finally Dent the Financial Statements

The most important thing the company has done this year isn’t having a great showing for a blockbuster (sic) movie release. It was being able to float a secondary offering for $70 million, something that simply wouldn’t have been possible last year. $44 million of the proceeds went towards immediately retiring some of the company’s debt, some especially icky 9.67% notes due next year.

IMAX’s balance sheet has been bloated for quite some time, and with this debt retirement the company may actually be able to report a net profit in the current quarter for the first time since 2005.

Even after the stock’s recent run, the market cap is just $360m. I maintain that the value of the IP (which may or may not have protection) and the brand is likely worth north of $500 million. To that end I’ll be taking a hard look at the financials and current management to see if this well-rested puppy is worth inclusion in the Secular Trends Portfolio.

In the meantime, while I can’t recommend seeing Transformers 2: Revenge of the Sith (wait, that’s not it…) on its merits, I can recommend checking out your local IMAX theater. It is an experience, and the brand has been maintained despite previous management’s best attempts to drive the company into the ground. This could be a double digit stock by the end of the summer.

Disclosure: author does not hold a position in IMAX.

Comments

[John Cordes:]

Good comment, thanks.

Jun 30 10:52 AM

[avi8tor:]

My wife and two sons have been trying to see that Transformers movie in IMAX since Thursday and every showing except last night's midnight showing has been sold out!

We arrived at the cinema yesterday TWO hours in advance of the 8:40 start, thinking we'd get our tickets and go for dinner; not a chance! Sold out! I mentioned to my oldest son that it was also playing in the regular format, to which his reply was "no way dad, that sucks!"

I just laughed and agreed to try again today... after all, my oldest was the one who told me at the beginning of the year that he wanted to see all of the big releases (Watchman, Star Trek, Night at the Museum, Transformers, Harry Potter and Avatar) in IMAX this year; which in turn made me look at their once PoS stock again. I should have bought more back then, but with the profits I made so far, my son can see any IMAX flick his heart desires and the old-man will gladly foot the bill!

Funny thing though... Harry Potter (his second favorite movie behind Transformers) is not being released in IMAX at the same time as it is in the regular theatres, it's two weeks later. Amazingly enough, both of my kids want to see it in IMAX and said they'd wait. I don't know if that will be a common thing or if perhaps (and I suspect this will be the case) they'll see it twice.

I think I'll hold some of my shares until one of the big studios decides that IMAX is ripe to be plucked.

Jun 30 11:26 AM

[Big Picture:]

Unfortunately, current management is the same that ran the company into the ground and lied on their balance sheets. The only reason the company is moving towards profitability is that they have sold out their brand image by slapping the IMAX name on standard DLP digital cinema and trying to charge a $5 premium for the service. Every new release brings IMAX closer to profitability, but reduces the overall consumer value of the brand. Some studio may still buy them, because of the brand value but again their brand value will be diminished over the next 12-18 months with the new inferior digital product. Do not pay to see a film in IMAX unless they run IMAX 70mm film and show it on a 5 story tall screen or you are being ripped off. Shame on IMAX and don't invest in their company.

Jun 30 09:05 PM

[Ryan Barnes:]

BigPicture: Appreciate the comments; the CFO, COO and the rest of the Finance crew are new at IMAX, but you're right about the lack of change at the CEO & Chairman level. Their previous escapades were due to bad financial management, but also strategic errors, so I'd have to agree that there hasn't been enough transition to start cheering for the stock.

My modest channel checks haven't come up with a poor viewing experience as of yet, but thx for the mention about the camera licensing. I'll be on the lookout for the mix of equipment at the company's theaters. That said, the odds of an acquisition (or perception hike) still seem well above the threshold that investors of a certain risk appetite would consider attractive.

Best of luck in your investing (or avoiding!) efforts.

Jul 01 01:02 AM

[vloscomp:]

BigPicture has a point: IMAX screen in the theater is a water down version of IMAX. However, most of the people that went to IMAX Trans 2 did not care about the screen sizes. The 70mm size is outside of a normal person peripheral vision, you have to turn your head to see it from one side to the other. Movies are made for 35 mm sizes, hence, the director will focus the action in mid screen.

I like IMAX theater, and i do see that the smaller size is a scam. I do, however, believed that people do not care, or see the difference when they spend the extra 5$ for IMAX Trans 2 ticket. This is the same phenomenon as iPhone.

The author also fails to mention that Disney has several movies for IMAX 3D in the pipeline; this is why i am bullish on IMAX before Aug 6, 2009.


On Jul 01 01:02 AM Ryan Barnes wrote:

> BigPicture: Appreciate the comments; the CFO, COO and the rest of
> the Finance crew are new at IMAX, but you're right about the lack
> of change at the CEO & Chairman level. Their previous escapades
> were due to bad financial management, but also strategic errors,
> so I'd have to agree that there hasn't been enough transition to
> start cheering for the stock.
>
> My modest channel checks haven't come up with a poor viewing experience
> as of yet, but thx for the mention about the camera licensing. I'll
> be on the lookout for the mix of equipment at the company's theaters.
> That said, the odds of an acquisition (or perception hike) still
> seem well above the threshold that investors of a certain risk appetite
> would consider attractive.
>
> Best of luck in your investing (or avoiding!) efforts.

Jul 31 11:51 AM