Don't Expect Box Office Revenues To Save IMAX

| About: IMAX Corporation (IMAX)

I've written numerous articles about IMAX, and why I believe that -- over the long-run -- it is not a sustainable business model. One of the tentpoles of my thesis is that IMAX cannot control the quality of the content it shows on its screens, from which it generates joint-venture box office revenue. Bad movies translates to bad box office.

I'm not alone in this thinking. Even an IMAX bull says, "I think the market has forgotten just how much earnings potential IMAX has when the right movies are released". The operative phrase in this sentence is, "when the right movies are released". Therein lies the rub. And this is from a writer who named IMAX his stock pick of the year.

The problem with models built on the expectation of consistent box-office performance is that box office performance cannot be predicted. I don't care what IMAX says its per-screen average box-office has been. If the phrase, "past performance is not representative of future results", has any meaning, it's for this exact case. In the book Hollywood Economics, author Arthur de Vany conducted a scientific study of all films released over a long period of time. His conclusion was that one can predict the box office of any given film, but with a standard deviation of infinity. In other words, box office cannot be predicted with any certainty whatsoever, far enough in advance to form a cohesive and substantive earnings projection.

In other words, you're gambling. Gambling has a negative expectation.

The only people who can even remotely peg these numbers are internal studio finance people, and that information is never shared with the public. IMAX investors who swoon at the prospect of recurring box office revenue, let me ask you something: Why are you investing in a business where you literally will not be able to even guess what revenues are going to be? How can you take a stab at a valuation? You can't.

What I can tell you is when IMAX has a blockbuster film on its hands that will contribute a lot to revenue and when it doesn't. Next year, The Dark Knight Rises and The Hobbit will be gigantic. But I can also tell you that Real Steel is not going to do much for IMAX revenues. Contagion didn't blow the doors off, nor did I expect it to. Why? Because only big, big, big action, fantasy, and animated films are right for IMAX. And as costs for these movies only increase, and the number of box office admissions continues to shrink, there will be fewer of these movies.

Look at the desperation in films like Star Trek being re-released in IMAX theatres as we speak. Why? Because there is no other product to put in the theaters! They have to go back to the dollar bin to jam something up on the screen.

If you really want to invest in movies, buy Walt Disney (NYSE:DIS), which has the Pixar and Marvel brands now, on top of the company's own legacy brand. It's a diversified revenue stream across tons of entertainment and media properties. The same goes for Viacom (NYSE:VIA), which owns Paramount Studios. Heck, I'd even buy Comcast (NASDAQ:CMCSA) first! At least there you get all of NBC, Universal Studios, a boatload of cable networks, and the cable business. I'd even put more faith in News Corp (NASDAQ:NWS) over the long haul, and that's including the phone hacking scandal! All of these companies are swimming in cash, have debt they can handle, have reliable free cash flow, and aren't relying on a business model where revenues cannot be predicted.

I reiterate my position. IMAX is not a buy. The easy shorting money has already been made. I would short above $20 if it gets back up there.

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

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