IMAX – the Upside

IMAX is a great stock waiting for its day… Or, rather, its year. The success of IMAX depends largely on the success of blockbuster movies – the kinds of movies with enough spectacle to entice people to pay extra for IMAX’s huge curving screens.
Avatar was the perfect example of such a film, and, accordingly, 2010 was a record year for IMAX.
Unfortunately, the first half of this year was lacking in huge blockbusters.
Transformers was the only real blockbuster in the last quarter, and most of these profits are booked in the quarter ending October 1 (Q3).  Harry Potter is the movie that promises to bring the greatest ticket sales, and ALL of these profits are booked in Q3. Thus, when IMAX reports Q3 profits, the market will likely be in for a surprise. I am expecting IMAX to report earnings this quarter that equal or exceed the earnings for the entire first half.
But the really exciting upside for IMAX is 2012. We keep seeing signs of an incredible movie slate next year: The Avengers, The Dark Knight Rises, The Hobbit, The Amazing Spider-Man – these are all sure to be huge blockbusters.
While we cannot expect Avatar-like success from any one of the 2012 films, the fact that there are at least four potential blockbusters (plus Man of Steel in January 2013) points to a year with similar potential.
To get a sense of the magnitude of this potential, lets consider the income earned in 2010. IMAX was able to pull in $100mm, with a pre-tax profit margin of 20%. This was largely due to the success of Avatar during the first quarter – evidenced by the fact that they earned the majority of 2010’s income in the first four months of 2010. If IMAX could earn the same amount of income in 2012, it would stand at a P/E of 10, given the market’s current valuation at $1B.
This is entirely too low for a growth-y name like this. IMAX built 88 new theaters in 2010, and has built 42 more so far in 2011, mostly in the United States, Europe, and China. IMAX makes a higher profit margin on its international theaters than US or Canadian theaters, so it has been pursuing these opportunities more aggressively in recent years.
China seems to be a market with an exploding movie theater industry, and IMAX has been positioning itself for the past couple of years to take advantage.  As of June 30, 2011, IMAX had 46 theaters in China, but these only bring in about 8.5% of the revenue. IMAX CEO Richard Gelfond has said he thinks IMAX can have 80 theaters in China by the end of 2011 – I think he is too optimistic. Current plans include 300 new theaters by 2016, which would represent a 53% increase over today’s 560 theaters world-wide. (1)
Future plans aside, let’s focus on the theaters IMAX currently has open.
71% of IMAX’s 560 theaters are in the United States (57%), Canada (5%), and Western Europe (9.5%), which we can rely on to have fairly similar tastes. These theaters currently bring in ~83% of the revenue.


We know that the franchises of the Dark Knight, The Lord of the Rings, Iron-Man, and Spider Man have been huge hits. In general, sequels, especially in these franchises, tend to perform on-par with or better than the originals. I believe that it is currently time to take advantage of the low pricing on IMAX stock to prepare for a major cyclical upswing when the 2012 movie slate hits.

References:

(1) Pierson. China is on a cinema-building binge. L A Times. http://articles.latimes.com/2011/mar/06/business/la-fi-china-cinema-20110306

(2)IMAX SEC filings. Mostly 2010 10-k. Some previous 10-k’s and 10-q’s. http://www.sec.gov/Archives/edgar/data/921582/000095012311017825/o67926e10vk.htm

Disclosure: the author currently owns shares of IMAX.

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