IMAX: Still Keeping the Faith

| About: IMAX Corporation (IMAX)

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

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imax chart
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.