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So, is a company ever too cheap to sell? That's a very apt question for Imax (NYSE:IMAX) shareholders. The large-format theater company reported a dismal quarter last week, bringing shares down dramatically once again (by about 20% Thursday morning).

I had thought that almost any possible bad news was baked into this stock. Clearly, I was wrong, as a .30 cent per share loss is a far, far cry from the .05 profit the analysts were predicting. I was shocked that they didn't install a single theater system in the quarter, which was the primary reason for the shortfall (though they did sign some additional deals, particularly overseas, and they continue to have a solid order backlog that will keep them busy with installations at least until the beginning of 2008).

They blame "slippages" in permitting and construction for these delays, but "expect" to install 5-8 systems in the fourth quarter of this year -- which ought to bring revenues back up to where they were in the third quarter of last year, when they installed 6 systems and recognized about $20 million in systems revenue (as opposed to this quarter, when they installed nothing and recognized about $7 million). The ongoing revenue was about the same year over year, even though the film slate was weak with the disappointing Ant Bully not doing much to drive revenue.
Imax picture
I bought these IMAX shares after they announced that they hadn't found a buyer for the company a few months ago. I fully expected them to step back and accept a somewhat lower price for the company, but one that was higher than the then-bargain price of around $6 (I've since sold the shares that I held before that announcement).

I was certainly wrong about that, at least for now. I don't know whether it's because the company is "damaged goods" with their SEC investigation or just because of the fragility of the movie theater business, but no one is stepping up to buy the company at the moment.

They have authorized their investment bankers to look for bidders at lower valuations, but that reeks of desperation -- the shares are now $8-10 lower than IMAX was hoping to get in a deal, and it seems that any interested buyers can simply bide their time and wait, like vultures circling a lame beast in the desert.

It is probably not really worth it for me to sell my IMAX shares at the moment, since as long as they remain a going concern and don't collapse into bankruptcy the share price is likely to recover at some point as installations pick up, and as the Spider Man 3 and Harry Potter movies mean film revenue is likely to be significantly improved in 2007.

But the temptation to sell just so I don't have to look at this red line in my portfolio every day is very hard to resist. They also face a significant risk in changing over to digital projection in 2008, as they plan, which could either really spur sales or drown them in additional development costs.

I don't have much faith in the company at this point, and their high debt levels and very weak reputation on Wall Street make the shares riskier than ever. But it does seem to me that they ought to be able to hit sales of at least $120 million next year with their order backlog, and I don't see a lot of justification for the company to trade at much less than 1X their sales as long as those installations remain profitable. At those prices, at least a private equity buyer ought to be interested -- although it gives one pause that Imax hasn't gotten a decent buyout price at a time when the markets are awash in cash that's looking for a home.

My reluctance to sell is probably a personal weakness, I feel to some extent as though I'm standing on the deck of the Titanic but focusing more on the abundance of ice cubes -- and I don't want to give anyone the impression that I'd advocate buying shares here.

IMAX 1-yr chart:

Disclosure: I do, regrettably, own a small (and shrinking) IMAX position.

Source: IMAX: Damaged Goods or Victim of An Industry Slowdown?

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