IMAX Corporation (IMAX: Charts, News, Offers), the Canadian movie technology company best known for its large-screen 2D and 3D theater systems, reported an impressive 80% increase in its third quarter earnings, with net income of $6.7 million, or 10 cents per share, a vast improvement over the $1.1 million, or 2 cents per share, the same quarter a year earlier. Its total revenue increased 17% to $51.1 million. Analysts expected 9 cents per share on revenue of $48.8 million. With the saturation of big screen IMAX 3D films flooding the market, the company expects the IMAX network to grow even faster throughout the rest of fiscal 2010, announcing 22-24 joint revenue sharing systems and 15-20 new sales-type lease systems in the next quarter. In the third quarter, ending September 30, the company installed 29 new systems, in comparison with 19 the previous year. It still has a backlog of 257 systems, suggesting no shortage of demand. Is IMAX currently an undervalued growth stock, or will interest in 3D IMAX films eventually wane as lower quality films inevitably dilute the brand’s appeal?
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IMAX’s business is divided into four main segments: films (32.4%), theater maintenance (15.4%), theater operations (13.2%) and joint revenue (3.2%) sharing agreements. The films segment produces films, which are known to the public as “shot in IMAX” movies, which are financed by third parties. It receives a production fee and acts as the distributor of the film. The rights to these films can be held by either the film producers, studios, or IMAX, depending on the contract. Most significantly, this division has developed technology to transfer traditional 35 mm film into IMAX’s 15/70 format. Most people remember that IMAX had previously been used for educational films, but in the past two years, with the collaboration of major Hollywood studios and blockbusters such as Avatar, revenue increased 50%. Its theater maintenance segment revenue consists of maintenance fees paid to IMAX Corporation by theaters using its equipment. The theater operations segment consists of IMAX’s own branded theaters, which are increasing in popularity. Finally, the joint revenues and sharing segment includes all its partnerships with other non-IMAX theaters.
IMAX’s growth has been fueled by the seminal 2009 hit, Avatar, which raised awareness of 3D IMAX film to a fever pitch. Following Avatar, which was originally shot in IMAX 3D, non-IMAX films were converted to the IMAX format, including Iron Man 2, Alice in Wonderland and Toy Story 3. While these films have been met with praise, others such as Resident Evil 4, Saw 3D and The Final Destination have been criticized as poorly made films which have exploited the IMAX 3D format as a money-making gimmick. To illustrate the blistering increase of IMAX demand, the company had box office sales of $14 million in the first quarter of 2009; by the first quarter of 2010, this number had increased to $187 million.
Despite criticisms of market saturation, IMAX has announced nine 3D films going into 2011, including eagerly anticipated ones like “Harry Potter and the Deathly Hallows: Part 2″ and “Pirates of the Caribbean: On Stranger Tides.” As long as moviegoers are willing to pay a premium, at about $3 more per ticket, for the IMAX 3D movies, movie studios are bound to increase their budgets for these more expensive, special-effects laden productions, which will in turn feed IMAX’s revenue stream. In turn, IMAX 3D tickets provide theaters with 25% higher revenue than traditional 2D ones, which will cause many theaters to make the effort to install more IMAX units to boost its sales. In addition, IMAX has erected extremely high barriers to competition, and to date has no viable competitors to the over-sized 3D screen market. As long as the demand for 3D keeps growing, as evidenced by the production of 3D capable televisions, IMAX is sure to profit.
IMAX’s global footprint is increasing considerably, with high demand in emerging markets and China. The stock, with trades with a P/E of 31.54 and no dividend, has been flirting with 52-week highs recently and may be overdue for a pullback. However, this is definitely one stock to add to your watchlist to bet on a strengthening consumer entertainment environment.
Other News About IMAX
IMAX Theaters host Harry Potter openings – Another multi-million dollar payout for IMAX.
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Batman: The Dark Knight Rises IMAX Clarification – Excitement brews about the eagerly anticipated Batman sequel being shot in IMAX 3D.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
