Within the context of the bull market we've been in, the growth of a little over 13 percent over the last year by IMAX Corp. (IMAX) isn't something that has inspired investors to put the company on their watch lists. If that continues, I think that will be a big mistake.
IMAX has two major growth catalysts that look to be sustainable over the next eight years or so. Those are the transition by Hollywood to rely a lot more on blockbuster films, which plays into the strength of IMAX, and its successful entry into the Chinese market, where it has well over 50 percent more of the market to expand into.
In this article we'll look at why both of those vital catalysts provide a potentially large growth trajectory for the company for many years.
The Hollywood film model has changed
Few of us need to be told that entertainment consumption has increasingly moved toward the home and smaller screens because of the ability to digitally stream content anywhere. For most films there is no upside for consumers to go to a theater to watch the movie when it can be watched from where and whenever it's convenient.
The exception to that rule is the blockbuster films that provide the type of immersive experience that can't be replicated on a small screen, or in a growing number of cases, even on regular-sized screens in theaters.
That's where IMAX comes in, as the film industry is increasingly reliant on creating blockbusters that are considered a must-see on the big screen, and to that end IMAX has been slowly becoming the go to experience for Hollywood and Chinese producers, who are able to IMAX tech to create an unmatchable experience for those watching at the IMAX theaters.
A recent example of that was “Avengers: Endgame,” where the taller screens of the company were able to display over 25 percent more of the picture than regular screens (not all IMAX screens are the same height).
When referring to tech above, I'm not talking about IMAX's cameras, because directors Joe and Anthony Russo used ARRI's large-format Alexa 65 digital camera to shoot the film. This allowed the directors to get a format that can be played on the larger screens of IMAX, with the additional flexibility of being able to bring their cameras anywhere. That's important to know because the cameras of IMAX are known to be large and difficult to operate.
Here's what I mean by the usage of IMAX's tech:
While projectors don't show [18K] other than our film ones... we employ a lot of technology around that. We scan the film into its digital form at the highest possible resolution, and we process it throughout the entire food chain at these higher resolutions. It's a technique called oversampling. What it means is that when you get to that 4K final content, because you've been processing it at a much higher resolution, you actually get a better quality image.
This is especially important when incorporating characters of different sizes in various action scenes.
All of that is to say that IMAX is positioned very well to take advantage of the transition of Hollywood to the blockbuster model in the years ahead. With most of them including a lot of action scenes, these films will not be interchangeable with small screens in the way normal films are. For that reason IMAX, with the quality of blockbuster franchises on the way through at least 2027, appears to have a growth trajectory ahead of it that is unmatched in its history. That includes the retrofitting of some of its theaters, and the entering into markets with new theaters.
The Chinese market
For several years IMAX has enjoyed significant growth in China. In the most recent quarter it generated over $100 million, up almost 20 percent year-over-year. It was the second-highest gross in the Chinese market since IMAX entered it.
The catalysts behind the performance were the increase in the number of IMAX theaters in China, good performances from domestic film titles, and a partnership with Maoyan, a Chinese ticket platform.
In 2018, the total take in China for IMAX was $337 million, up 16 percent from 2017. It looks like that is going to improve annually over the next several years, based upon expected increase in screens and attraction of a superior immersion experience at existing outlets.
The remainder of the year remains optimistic in China, with the performance of 'Avengers: Endgame' producing the largest IMAX opening ever in China. It generated over $21 million in its first two days, and $42 million over the first five days. That is more than the total revenues generated by 'Infinity War'. There are 609 IMAX screens in China at this time.
While IMAX screens only account for about 1 percent of all screens in China, Endgame generated 13 percent of the box office in the country, reinforcing my thesis that blockbusters, no matter what market they're successful in, are the foundation of IMAX's long-term success.
Another part of the Chinese market I don't think is understood by most investors is the popularity of films produced within the country. That is going to be a big part of growing success for IMAX, with a good performance from 'The Wandering Earth' being a recent example of that.
It's noteworthy that the company believes it has only penetrated about 42 percent of the overall Chinese market, leaving approximately 58 percent more potential growth before leveling off.A growing number of Chinese filmmakers are deciding to go with IMAX cameras in order to boost quality, revenue and earnings. That in turn will have IMAX grow its international sales.
Other key global markets it's increasing its presence in are Japan, Germany and France. The company has been exceeding its past performance in those markets as well.
Based only on the two Disney franchises of Star Wars and Avatar, the years ahead should be very profitable for IMAX. As Hollywood continues to gravitate toward an immersive experience to battle the streaming competition, IMAX will be at the forefront of that move, and the blockbuster franchises above should, with most if not all releases, surpass the $1 billion mark each, and in the case of Avatar, we could see some of the releases surpass the record recently set by Endgame.
Over the next seven or eight years, Disney is going to alternate Star Wars and Avatar releases, which will provide IMAX a consistent stream of revenue that will have a strong impact on its top and bottom lines. Add to that other franchises and the burgeoning Chinese market, and it's easy to see that IMAX is a bargain at this time compared to what it'll be when it starts to receive the benefits of the era of the Hollywood blockbuster.
Not only would IMAX do well as it is today, but it's increasing the quality of some of its existing screens while continuing to add more on an annual basis.
This year it's expected to install from 185-190 theater systems, with 45 of them being upgrades to IMAX laser, and 140-145 being new theater systems.
With the performance of Endgame, growth in China, and the new systems, the company has upwardly revised it guidance from mid-to-high single-digits to low double digits. I see this momentum continuing over the next seven to eight years.
In 2017 the company generated net income of $2.3 million, and 2018 that jumped to $22.8 million. That will continue to climb going forward. A lot of investors aren't aware that IMAX has enjoyed 13 straight earnings beats. There is nothing to suggest this is going to change. A key reason for that is most of its partnerships require little capital expenditure on the part of IMAX, resulting in low risk and costs. That points to earnings continuing to move in an upward trajectory even as revenue jumps in the years ahead.
At the end of the first quarter IMAX had a total network of 1,514 systems, with 1,420 of them part of commercial multiplexes.
The way to think about IMAX is that while Endgame was a record breaker, it shouldn't be considered an anomaly. While there won't be a lot of films that will challenge that record, there will be a number of them that surpass the $1 billion mark, and IMAX will get a nice piece of the action.
The bottom line is we are in the era of the blockbuster, and markets around the world are looking for ways to enhance the immersion experience in theaters in order to attract those that have migrated toward smaller screens as their preferred way of consuming content.
IMAX is at the center of that move, and I believe is on the precipice of a growth spurt that will make investors don't take a position in the company wish they did before it takes off.
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.