IMAX: The Big Picture

| About: IMAX Corporation (IMAX)

Avatar, the overwhelmingly successful James Cameron film, didn't change anything for IMAX Corp (NYSE:IMAX). It just cast a light on the potential that none of us understood the week before it opened. The recipe was there the whole time but nobody was biting until James Cameron put out a spread that was irresistible. Avatar showcased everything that is great about the IMAX experience; the larger than life screens, the vivid high definition effects, the incredible sound systems, the next generation 3D technology and the fat premium attached to the ticket sales for the IMAX format and 3D. It was not only incredible for the consumer but attractive for the movie houses as well. Since Avatar there has been a string of blockbusters that have shattered box office records with a big boost from IMAX Corp's premium formats. The most obvious successes have been Harry Potter and the Deathly Hallows 2, Transformers: Rise of the Fallen, Hunger Games and The Avengers.

A few films grossing over a billion dollars isn't the whole story though. In fact, it is just a thumbnail of a much larger picture. In 2008, there were just 210 commercial IMAX multiplexes. Fast forward to the middle of 2012 and there are over 580 multiplexes, over 300 of which are the joint-ventures in which IMAX takes a share of the box office.

While the increased percentage of joint-ventures represents a smaller profit from the sale initially, the residual income from their share of the box office makes up for it in the long run and then some. These joint ventures do introduce additional risk. If box office sales slump it may take much longer for IMAX to see a return on their investment. This is not a matter of "if" IMAX sees a return but "when" and frankly, I think the risk is minimal. The film slate year to date as well as those that have yet to release should only encourage more film houses to succumb to the temptation to upgrade to the IMAX format or 3D or both. In July alone there are two films that are very likely to exceed one billion dollars in global ticket sales, the Spiderman reboot, opening on July 3rd and The Dark Knight Rises opening on July 25th.

This increased participation in the box office ticket sales coupled with rapid pace of theater installation will be the primary driver of revenue increases going forward. Installations outside of the US and Canada are a substantial percentage of the 305 joint ventures currently on contract, 75 of which are in China. China is viewed as severely under served in both the standard format and premium movie theaters. With as much as 50% of China's population inching towards middle class, the world's second largest economy is expected to continue to be a one of IMAX Corps greatest expansion opportunities. The number of IMAX theaters installed could very well exceed 300 theaters by 2015. There is also significant opportunity in much of Europe, India and Latin America.

The bottom line is that special effects have finally reached the point that the IMAX experience is worth the premium and that has been recognized the world over. The key to IMAX's success will not be in the volume of movies either shot in IMAX format or converted in post-production but in the quality of the films they do endeavor to enhance. Not every movie should be 3D. Poor quality films or films in which 3D or the IMAX experience does not add to the film's grandeur will undo everything Avatar accomplished. Some analysts get hung up on the fact that IMAX can't control the quality of their product. I agree, IMAX Corp needs to be selective with the projects they take on. So many movie houses will attempt to wring every penny out of the 3D format thinking it is a fad and they need to get as much out of it as they can. Unfortunately, while I disagree with that line of thought, it could be prophetic if IMAX allows low quality films to hit their screens. It is bound to happen on occasion but IMAX needs to be wary of letting it happen too frequently. Nobody likes to pony up $10 per ticket and 2 hours of their life to see a bad movie and that awful feeling that you have been duped by clever marketing is only compounded when the consumer has also paid the premium for the IMAX experience and 3D. That certainly is a challenge but it will not prevent me from buying into a stock with so much growth potential.

IMAX stock has been trading in the low $20s and that is a tremendous buying opportunity. IMAX hit a high of $38 last year before the concern of an impending double dip crushed the momentum the stock market gained in 2010. IMAX's fundamentals have only improved since the stock fell from that lofty height. Scheduled theater installations continue to grow and box office ticket sales have increased yet IMAX stock price has yet to recover. While I do not expect IMAX to see $38 any time soon it could easily reach $28 by the end of the year.

Disclosure: I am long IMAX.