The 2nd Half Of The Year Looks Clear For Imax

| About: IMAX Corporation (IMAX)

Summary

IMAX reported a better than expected set of earnings, contrary to my initial concern on the stock.

Second half could be better for IMAX given the attractive slate of new films in the pipeline.

China remains a solid driver and original content production could be one way for IMAX to gain more shares in the country.

Imax (NYSE:IMAX) reported a better than expected quarterly earnings with revenue coming in at $91.74m, or $5m above average analyst estimates, and earnings per share of $0.18, or one cent above estimate. It was impressive to see how IMAX can beat revenue and earnings even though the global box office saw a 24% decline to $260m in the quarter as the prior year included hit titles such as the Furious 7, Jurassic World and The Avengers. (see: Expect Weak Earnings From IMAX) During the quarter, IMAX signed 95 theaters and there are 442 backlogs that included 40 from Guangzhou Jinyi and 25 from AMC.

What we can conclude from the quarter and going forward is that IMAX's operation seems to be steady and that with a sluggish Q2 out of the way investors can expect a better Q3 due to better movies in the second half of the year.

When we look at IMAX's quarterly update, we see that the company continues to be on a good pace in winning new theaters into its network as suggested by the fact that 38 out of 40 theaters in the quarter were new while only 2 were upgrades. At the end of the quarter, IMAX has 1102 systems, of which 990 were in commercial multiplexes that usually have better foot traffic. In addition, interest in IMAX's technology remains strong as it appears given that the number of backlogs has increased 14% from the prior quarter to 442 theaters.

Second half movie market could be slightly better than Q2 due to the promising pipeline that includes Suicide Squad, Dr. Strange, Kong, Guardians of Galaxy, Spiderman and Star Wars which I believe can draw movie goes to the theaters and the IMAX 3D experience could benefit from the rising movie traffic.

China could also be a catalyst given how good IMAX China has been doing. In the first half of the year, IMAX China saw revenue grow 25% after signing up 79 theaters compared with only 18 last year. Demand for the IMAX systems remains resilient as 30 were installed in the second half, representing a growth of 67%, leading to growing profitability for IMAX China with a $17.7m net income compared with a $67.9m loss a year ago. Future demand also seems to be strong judging by the 23% increase in backlog.

One way for IMAX to further expand in China could be working with local partners to produce local language content. I note that the 2015 movie "Mojin: The Lost Legend" was the 10th highest grossing IMAX release globally and it is a good indicator of IMAX's potential in original productions. IMAX has had a good track record working with Chinese film makers and likewise the Chinese also wants IMAX to do well due to the strong demand for IMAX products. I think this presents an attractive opportunity for IMAX in China.

Another driver could be IMAX's close links with Wanda, China's largest theatre operator. Wanda has been accelerating its installs and by early next year IMAX's current deal with Wanda will be completed. A new deal with Wanda could add meaningful backlog to IMAX, which is generating better results than Dolby. I think this could prompt IMAX to switch from Dolby to IMAX, resulting in potentially 100 more screens for IMAX in 2017.

In conclusion, IMAX cleared the quarter in which I thought it could face macro challenges but given that is out of the way I am more comfortable accumulating IMAX shares for the second half of the year due to an attractive film pipeline and growth in China.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.