New Contracts Bolster Business for IMAX

IMAX (IMAX): Does the company even need a description? With instant name recognition, it goes without saying that they make, sell and lease the projection system which delivers larger than life movies. But the company has left investors scared, shaken and sleep deprived... and it isn't because of a recent horror movie they saw in IMAX.

Its share price hasn't exactly been larger than life. With a 52 week high of $11, and a current trading price of $4, two huge price drops have burned those holding stock. Recent activity has brought some life to share price though, as buyout rumors brought it up (and subsequently down), and contract agreements have brought some much needed new business.

I bought into IMAX at $3.42, in December, when it was near its 52 week low. The company has a large amount of debt (160 million) on the balance sheet and performed zero installations during the last quarter. An SEC investigation, bad management and poor sales have been detriments to the stock. There has been speculation of a buyout, but nothing has materialized.

The company has been stubborn in its search, not finding a buyer when it was trading close to $6 and more recently when it's been below $4. It climbed to $4.20 on speculation of a buyer, but came back down when the company announced that it couldn't find one offering a suitable price. Since then it has risen back to $4 and could continue further. Many still worry though, looking at the price history and the company's recent performance, but I believe that its share price has found support around $3.40 and that its business is capable of bringing in revenue.

When the company came down on its last plunge, it held steady in the middle of $3 and didn't drop any further. The first price bump was due to buyout speculation, but that isn't something I would rely on or hope for, as it seems the company won't be satisfied with an offer. Recently the share price has climbed back up, with the announcement of contracts with Zyacorp and Kerasotes theatres. Zyacorp inked a deal for 2 theaters, which will open in 2007 and 2008. The Kerasotes deal will open a theater in 2007.

This news helps bolster the business model for IMAX, which has come under fire with its most recent quarter's performance. While IMAX's format will never replace the conventional theater, it does offer an enhanced viewing experience which has been compared to switching from low def TV to HDTV. At a price of around $12-15 a ticket, the price does command a premium above a normal movie, but is not so substantial an increase as to deter movie goers, who have already accepted the fact that they'll be paying an arm and a leg for the night.

The "wow" factor will always attract kids to animated movies shown on the screen, and action films, such as Spiderman 3, will appeal to everyone. Unfortunately, the opening of the Zyacorp theater won't be in time for Spiderman 3 (May), but it will premiere with Harry Potter: Order of the Phoenix (June 29th), which will be a big ticket for all audience ages. All things considered, the screens benefit most from educational or documentary films, as charted in these figures.

Analysts may worry about the business model, but I believe that IMAX's product is not a fad and recent theater deals back that up. Kerasotes is North America's sixth largest exhibitor and Zyacorp is the fastest growing theater chain in Maine and New Hampshire. Being backed by Kerasotes is important, and while New England might not be the biggest market, it's a market nonetheless and it bolsters the fact that theaters see value in this product. The IMAX MPX can be built more economically (than previous IMAX screens) with a new multiplex, but this format can also be adapted to existing theaters, so they don't have to undergo the expense of building a completely new theater. IMAX's format is one that can be enjoyed by all ages and demographics and the numbers are there to prove it. Now the contracts just need to keep coming in.

Disclosure: Author has a position in IMAX.

IMAX 1-yr chart