Well, I couldn't resist. I might be grasping for a falling knife, which doesn't often work out that well for me, but I think the reaction to Imax's news this evening was wildly overdone, and I ended up buying a few more shares as the price tumbled by about 35% due to bad corporate restructuring news.
When I saw that Imax had not come to an agreement to be acquired or form a partnership with one of the four bidders who were interested, I certainly expected the shares to lose ground. But in my opinion, the possible deals were so nebulous and the performance of Imax films in the first quarter so weak that there really wasn't much of an acquisition premium built into the shares.
After all, the shares were well above $9, and they were doing pretty well on raised guidance for FY 2005, when they announced they were exploring "strategic alternatives" back in early March. Certainly, everyone who invested in this company since then has been focused on the possible takeover, and on a buyout premium that would drive the price to the neighborhood of $12 to $14.
And if the price had hit $14 before this announcement, the 30%+ decline would make a lot more sense to me.
But it didn't -- the premium never really got priced in, so I guess you can say the market was, very rightly, cautious that a deal would happen at that price ... or at all.
So how does Imax look without being an immediate takeover target (and it still may be in due course -- they are still exploring their options)?
Well, to begin with, they did beat the earnings estimates for this quarter, and they beat on the revenue number as well. So this reaction to the announcement is clearly just a reaction to the buyout news, the company's operations seem to be fine as far as I can tell.
Analysts are estimating an average of 42 cents in earnings this year and 62 cents next year -- and given the good backlog of installations, the constant announcements of new theater deals, especially overseas, and the great slate of films for next year (Spiderman 3 and the next Harry Potter), I have no reason to question that estimate. Superman Returns has been big for them so far this summer, and Imax is certainly starting to get more of a push for these simultaneously released blockbusters as studios see the gravy Imax showings can pour onto their box office results.
So I put in a limit order at $6.20 after hours, fully believing that this price, more than ten percent below the low hit in January, wouldn't deliver the shares to me. But I thought it was worth a shot.
And now, surprise, I'm the proud owner of a few more Imax shares. I've said before that this is not my favorite company in the portfolio, and that I would have given up my shares at $13 without a fight. That's still true.
But buying shares of this company, which I believe is growing well and has further growth prospects, at a forward PE of 10, is too good to pass up.
It might be that I'm just being stubborn.
This is certainly a small gamble, and I haven't put a ton of money into it. It's possible that the company will truly suffer in the short term without a deep-pocketed partner or a buyout -- but in my opinion, the risk is that they won't grow as fast as their market will bear if financing is weak, not that they will actually have operational difficulties in continuing to grow at the moderate pace they've kept up so far.
Wall Street is having a hard time believing that Imax is for real, and no one was willing to step up to the plate and pay enough cash for the company to make management recommend a buyout -- so it could be that the company really isn't worth as much as I think it is. But it could also be that the arbitrage rats fleeing the sinking ship are just being short-sighted ... only time will tell.
IMAX 1-yr chart: