IMAX: Still Keeping the Faith

An IMAX 1-year chart: An investor's dream chart.... oh wait, more like an investor's Armageddon.

click to enlarge

What we've seen of late is a bottom and some increased momentum as IMAX has posted some strong price gains. The stock was up 16% last week with increased volume.

I wrote about the company on Jan 16th, saying that "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." I didn't recommend the stock, but spoke highly of the recent contracts which they have signed, one of which was with a high profile American chain, Kerasotes.

Since then, IMAX has signed a deal to install two theaters in the China Science and Technology Museum. Including these two theaters, IMAX will have a presence of 27 theaters in China at the end of 2008. They currently have 280 theaters in 40 countries. Theater signings haven't been a problem for IMAX though, as their current CEO has stated there are 73 orders in the backlog which have yet to be installed. Management has been a core issue with the company, as there have been SEC inquiries, stubbornness with buyout offers and lackluster production.

In regards to the SEC inquiry, IMAX was under scrutiny due to its revenue recognition. Because the company receives money before the theater is installed, there was a question about revenue streams from theaters that were not bringing in money. The CFO left the company and a lawsuit was filed on behalf of shareholders, claiming that revenues were inflated in order to attract investors. It was before this ordeal that management was shopping around the company, looking for a buyout price of $14. Seems like a ridiculous amount considering the current stock price, right (a 318% premium)?

Management has had delusions of grandeur regarding buyout prices since seeking $14 a share. After the massive sell off in August, management rejected buyout offers at a number of prices, which would be considered significant premiums to the current share price. In late January, the CEO said there are no plans to shop the company around, but that there was the potential for joint-ventures with theater chains, of which AMC has been named as a potential candidate. Management's refusal to accept a buyout offer has appeared foolish as an irregular revenue stream and consistent, significant debt are things a potential suitor must factor into the equation. Given their stubbornness and removal of the company from the sale block, I wouldn't count on a buyout. What I would look for is joint-venture agreements, which would lessen the cost for theaters and increase sales volumes for IMAX.

That brings us to the last misstep within IMAX, which is lackluster production. To their credit, it is a difficult aspect for the company to control, as the individual theaters have their own business constraints which IMAX must work around. To their discredit, there were no installations in the last quarter! This is unacceptable, and the street responded by dropping the stock down to $3.40, a 30% decrease. The disappearance of installations is a troubling event, but with a backlog of 73 installations, I think the reaction was a bit much. As I mentioned previously, interest in the product remains strong, even as management missteps hurt the company.

In conclusion, let's look at the catalysts which will keep this momentum going:

A joint venture - they are looking to accomplish this within the first quarter. It is a move that will not only bring in a new contract, but will also increase accessibility to the product for theater chains looking to cut their costs.

Blockbuster movies - Spider Man 3 and Harry Potter will be big hits in IMAX and promote the company to theaters who have not yet installed the system. Also, educational films will continue to bring audiences of all ages into the theater. This has always been a big revenue generator, with Everest taking the cake as the top producer.

Digital movies - IMAX is expected to go digital in 2008 and doing so will increase their margins as well as increase the number of films shown in a year from 6 to 10.

The first two bullet points are obviously short term catalysts which would keep the momentum up, with the last one being a reason to hold the stock for a longer time period. While the stock fell out of favor with investors over the past six months, it still has reasonable institutional ownership, at 32%, suggesting that there still is some belief in the company and room for others to move in. With the 12% increase in this last week, there has been no real news for the breakout and a correction could be in the works. Once that dip occurs, I would consider moving into a position.

Disclosure: I am long IMAX.

Comments

[Daniel Vachon:]

Tim I agree with you...I'M also long took position on the dip....and this is why....

3-D: The future of film lies this way

Moviegoers were able to watch the blockbuster Superman Returns in 3-D and on the giant IMAX screen last summer.
Shades of Smell-O-Vision
Sure, we may be on the cusp of a 3-D revolution, but the next-next stage in the moviegoing experience may be just around the bend.

Derek Tse
Apr 14, 2007 04:30 AM
Bruce DeMara
Entertainment Reporter

Coming soon to a theatre near you, 3-D – the technology behind the laughable 1950s gimmick with the goofy red-blue glasses – is poised to change the face of filmmaking.

With world-class directors like Peter Jackson, Robert Zemeckis, Stephen Spielberg, George Lucas and James Cameron clamouring to get on board, and studio moguls like DreamWorks chief executive Jeffrey Katzenberg extolling the virtues of the vastly improved technology, 3-D may become the vehicle that keeps movie houses humming in the years ahead.

Adina Lebo, spokesperson for the Canadian Motion Picture Theatres Association, goes so far as to call 3-D a major part of a "renaissance" in filmmaking at a time when box offices are competing for the consumer dollar with home entertainment, video games and other leisure pursuits.

"It is a very competitive market and everybody is looking for ways to compete for the public's entertainment dollar and their time," Lebo said.

"It's a renaissance. (A 3-D film) is more compelling, more intense...and immersive. It puts you in the 3-D world of the film, wherever that is."

The evidence for an emerging new age in 3-D filmmaking is stacking up:

Cameron has publicly stated he intends to make all of his future films in 3-D. His latest live-action project, Avatar, set for release in 2009 by Twentieth Century Fox, reportedly has a budget approaching a titanic $200 million.

Zemeckis' animated film version of Beowulf is set for release in November, while in 2008 New Line will release Journey 3-D, a live action film about a trip to the centre of the Earth.

Lucas has announced plans to release 3-D versions of his Star Wars films. Jackson and Spielberg are both planning films in 3-D.

IMAX Corporation, which has developed its own version of 3-D, has reported major success – with the release of documentaries and films like Space Station and a 3-D version of Polar Express – and as a result has dramatically improved its bottom line in the past few years.

Theatres are increasing their capability to screen 3-D features, as evidenced by Chicken Little, which debuted on 84 screens in 2005, a 3-D version of Tim Burton's Nightmare Before Christmas that opened last October on 187 screens and last month's release of Disney's Meet The Robinsons, which premiered on 581 screens.

At a time when theatres across North America and the world are converting from 35-mm projection systems to digital, new 3-D systems are affordable and easily adaptable to the new digital technology.

And while animation has, up to this point, been relatively easy to convert to a 3-D format, industry insiders forecast that live-action 3-D films are around the corner.

"I personally believe that the future of 3-D ... is taking live-action Hollywood films and converting key pieces of them to 3-D," said Greg Foster, president of filmed entertainment for IMAX, pointing to last year's release of Superman Returns –where four action segments comprising 20 minutes of the film were converted to 3-D – as a major breakthrough.

While remaining coy, Foster promised the corporation will announcing future IMAX 3-D releases in the near future.

Pat Marshall, spokesperson for Cineplex Entertainment – Canada's largest theatre chain – said the positive audience reaction to the small number of its theatres that have 3-D capability shows the technology is "an important part of the future for us."

"The fact that so many filmmakers, especially of the calibre of James Cameron ... say they want to make their films in 3-D bodes very well for the technology," Marshall said, noting the chain has converted four theatres to RealD technology so far.

Marshall and Lebo say 3-D technology has applications beyond film.

As movie chains continue to expand their business by incorporating "alternative programming" in their theatre spaces – such as live sports and concerts – testing has already begun on converting them into the 3-D format.

Marshall said an NBA game brought to a test audience in 3-D was enthusiastically received and Lebo said the ShoWest convention in Las Vegas for industry leaders featured a U2 concert in 3-D.

That creates a huge potential to bring Broadway shows, opera and dance into the movie theatre space, they say. The sky really is the limit.

As Lebo said, "Could you imagine 3-D performing arts from around the world coming to a movie theatre on your choice? It's quite interesting times."

Now Imax was able to getconsent from Bondholders (creditors) on friday IMAX's shorts start covering big time....the shares are due for bouncing back nicely in 2007-2008 because IMAX plan to install 20-30 JV and 40-50 Digital center in 2008....IMAX with his new MPX Technolgy you can Install 3-D almost anywhere....guess how many multiplex around the world????

"Based on our initial discussions with financial advisors and exhibitors, we hope to sign between 20 and 30 JVs per year in 2007 and 2008 and then increase that rate as we transition to a digital projection systems to around 40-50 per year. The digital system should lower the cost of our contributions by at least $100,000, and as Brad discussed allow us to show more films and give our exhibitor partner much more operating flexibility. Because of the film flexibility, the digital system should materially increase the revenues per theater. "

Finally....looking at market value of $184M and lost of over $300M value in last year for a $2.5M error in accounting is quiet "IRRATIONAL" like Greenspan use to say LOL

I guess Mr Market "OVER REACT"??? Right?? LOL

"The company, along with PricewaterhouseCoopers... is looking into about $2.5 million in accounting errors from 2001 to 2006 related to expenses incorrectly accounted for as capital costs."

NEXT LEG IS UP....and IMAX will do very well in 2007 and I guess someone soon or later will make an offer for $10 US before it goes to $30-$40 like 4-5 years ago

Dan

2007 Apr 14 11:15 AM