IMAX Is Poised To Outperform

Aug. 5.14 | About: IMAX Corporation (IMAX)

Summary

Imax (NYSE: IMAX) has suffered along with the rest of the industry from a cyclical downturn in the movie business.

Imax has an expanding presence in China that is extremely promising.

Imax stands poised to benefit from both a cyclical rebound in the movie business and its expanding operations in China, where overall box office is rising rapidly.

It's Time to Get On Board the IMAX Train

There is no question that 2014 has been a rough year for the movie industry. There have been few blockbusters, and box office is down sharply this summer. However, the movie business has been through these cycles before and always has recovered from them, so now is the time to scour the sector for good plays. Imax Corp. (NYSE:IMAX) is such a play.

The outstanding early performance of Disney/Marvel's live action/animation hybrid "Guardians of the Galaxy" could be a harbinger of things to come and is getting people excited about the film business again. That film opened with $94 million in the U.S. over its first weekend at the beginning of August 2014, setting a new industry record for an August opening. It added an additional $66.4 million overseas for a global total of $160.4 million.

IMAX Corporation (IMAX) [TSX: IMX] is a great play for a cyclical rebound in the movie business, and there are unique reasons to choose it as a long.

Background

Imax is a Canadian corporation based in Toronto that was founded in 1967 by three filmmakers: Graeme Ferguson, Roman Kroiter and Robert Kerr. They were inspired to create a new theater technology using multi-screen formatting. They hired an engineer to develop their idea, which involved creating an entirely new projector designed to show films with exceptional quality. The company's first film was "Tiger Child," exhibited in Osaka, Japan in 1970.

Imax publicly listed on the NASDAQ in 1994 and later on the New York Stock Exchange. Since then, the company has been a leader in 3D technology, called IMAX 3D. Imax's oversized screens, surround sound and steep stadium seating are known the world over.

Overall Prospects for Imax

Imax now has over 837 theaters in 57 countries. Its proprietary theater technology delivers a unique viewing experience that cannot be replicated elsewhere. Imax charges a premium price for a premium product. It has grown because people like its product, and they still do.

Some may believe that, with the growth of iPads and other platforms for downloading films, there will be decreased demand for pricey theater showings. However, one could have said the same thing about the advent of television in the 1950s and personal computers in conjunction with the Internet in the 1990s and other technological developments over the years. The film business, and Imax, just keep on going and work with new technology, not against it.

CEO Richard Gelfond put forward his view of that in a July 30, 2014 interview on CNBC:

"Well, I think in an ironic way, some of the changes 'in home', IMAX is a beneficiary. Because if you can get product or content across so many different platforms, when you leave the home you want something special. So, I think there are certain movies you'll watch on your iPad, so when you go out you really want to see your Imax. So I think that what's really fueling our growth is the hope for a more and better out-of-home experience."

The year 2014 has been rough for the entire film business, with box office receipts down substantially. However, just as DreamWorks CEO Jeffrey Katzenberg noted during his 29 July 2014 earnings conference call, the business is cyclical and almost certainly will rebound.

As Gelfond further noted during his CNBC interview:

"I think it's definitely cyclical. I mean, the movie business has been around for over 100 years and there are good years and there are bad years. And every time there are two good movies in a row everybody says "It's back," and when they say that there are two bad movies in a row they say the move business is over. But I think if you look over the last number of years it's relatively constant. When you go to 2015, there's a whole slew of blockbusters coming along, including the next Star Wars, Avengers, Jurassic World, Fast & Furious, Bond, many others. So I think 15/16 look like very, very robust years."

That said, he also noted that it is too early to "throw in the towel" on 2014, with films set for release from Chris Nolan of the "Batman" trilogy ("Interstellar"), the next "Hobbit" film, and others. Don't forget the next "Hunger Games" sequel set for release in November, either.

Imax reported strong financial reports for the second quarter of 2014, and that should only get better as the film industry cycles back up and the blockbusters that are in development get released.

China and the Rest of Asia

From its very first film in 1970, Imax has had a presence in Asia. That presence has taken root, is thriving and is growing quickly.

In the movie business, everybody's eyes are on China these days, especially since "Transformers: Age of Extinction" earned more in China during its first five days of release than the United States. Disney and DreamWorks Animation are building theme parks in Shanghai, Lions Gate is planning on opening its library of 13,000 films to the Chinese market through Alibaba, and IMAX is determined not to be left behind. While some others may be having difficulty entering the Chinese market, Imax isn't.

In July 2014, Imax concluded a deal with China's biggest state-owned exhibitor, Shanghai Film Corporation, Shanghai United Circuit Co. and Shanghai SFG-EPR Cinema Development & Management that will see the distinctive Imax screens appearing throughout China. Shanghai Film is the second-largest exhibitor in China. Anything that Imax can do to increase its market penetration into this market of over a billion people is a positive. The Chinese people are hungry for the best entertainment just like everyone else.

That same month, Imax also amended an existing agreement from March 2011 with Wanda Cinema Line Corp. to enlarge its presence in China. Wanda is Asia's largest theater chain owner, and the deal calls for up to 120 new Imax theaters on the mainland. News released the same day that Imax had extended its lease agreement with AMC from 10 to 13 years in the U.S. almost seemed like an afterthought.

Imax also formed a joint venture with giant Chinese Television maker TCL Multimedia Technology last year. China is a huge potential market for the pricey home theater systems, and the Shenzhen-based electronics giant is perfectly positioned to take advantage.

In his July 30 interview on CNBC, Imax CEO Gelfond noted:

"Well, in China in particular, we were fortunate enough to be way ahead of the curve. So, we have 168 theaters open in China already, and in backlog set to build our network will be over 400 theaters. So, when we're involved in a film in China, whether it's an American blockbuster or a Chinese film, we typically do 10 to 15% of the box office. China's just been a giant wave of demand. As the economy has progressed and discretionary impact has gone up, that's just a huge new moviegoer population."

Asia in general is a huge positive for the company that has not been tapped yet, he added:

"So much so across Asia, you look at the Philippines, Malaysia, Indonesia. And Imax, our revenues used to be much more North-American based, in the last quarter it was 57% international, and you're really seeing that growth in the emerging markets."

Asia is the key to the whole film business over coming years. The major players are rushing to establish presences there as though it were the Klondike during the old Gold Rush days. Imax is right there, already in the front door and making friends across the region.

Stock Performance

Imax has been trading between 24.01 and 31.23 over the past 52 weeks. it remains near the low end of that range, currently at 26.70. The history of Imax has been that it has been a good long during these cyclical downturns. A stop around the 52-week low gives room for a rebound while limiting potential losses.

Conclusion

Imax is poised to benefit both from a cyclical rebound in the global movie business and its expanding presence in China. If the pros like CEO Gelfond and Jeffrey Katzenberg are correct and the movie business rebounds in coming months and years, now is the time to start looking at companies that should benefit. Imax is perfectly positioned for a film industry rebound.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.