In the wake of Marvel's The Avengers blowing past $1 billion at the worldwide box office -- a fair portion of which no doubt derives from the sorts of premium showings I attended opening weekend -- I find myself drawn to RealD (NYSE: RLD ) , the 3-D projection systems manufacturer.
There's a lot to like. Back in 2003, RealD made a big, early bet that theater owners would want the ability to show 3-D features if they didn't have to spend massively in order to accommodate the format. And that, in turn, would draw Hollywood to digitize more blockbusters.
A curtain of cash rises
Fast-forward to today. RealD says 29 films featuring its technology are due to hit screens this year. From Feb. 18 through April 20, a handful had hit theaters -- with Dr. Seuss' The Lorax and The Hunger Games counting as the only real blockbusters among the bunch -- resulting in $460 million in box office revenues. RealD is due a portion of those proceeds.
Therein lies the beauty of this business. RealD seeded the market via licensing agreements whereby, in exchange for limited upfront payments, theater owners agreed to kick back some of the gate for films shown in RealD. Thus, the more popular 3-D blockbusters become, the more the company would earn.
Or at least that was the theory. In some cases, RealD allowed exhibitors to purchase stock options at highly advantageous rates. The company has recognized tens of millions in revenue reductions as a result. The good news? All outstanding exhibitor options had been exercised and accounted for as of December.
What to expect when you're expecting 3-D results
When RealD reports full-year earnings May 31, tens of millions that would have been lost to options largesse in earlier years should now show up as revenue. We'll also get a sense of expected contributions from both The Avengers and The Hunger Games.
Interestingly, Wall Street isn't expecting much from Hollywood. Shares of studio parents Walt Disney (NYSE: DIS ) for The Avengers and Lions Gate (NYSE: LGF ) for The Hunger Games have seen mixed results since big-ticket pictures began rolling into cinemas in February -- Disney is up, Lions Gate is down -- yet neither has done as poorly as RealD, which has seen its shares slide nearly 8%. Peer IMAX (Nasdaq: IMAX ) has fallen even further, down 14% after failing to fully capitalize on the box office success of The Hunger Games.
Is either slide fair? I'm not so sure. IMAX is pretty well positioned. Meanwhile, long-held concerns over RealD subsidizing 3-D glasses -- the program has cost ten of millions in years past -- may have become overblown. Product revenue from international eyewear sales and studio kickbacks for the special specs resulted in more than $4 million in operating profit in the December quarter, and nearly $16 million for the nine months up to that point.
Management says some of the gains were due to consumers taking the unusual step of recycling glasses used in watching earlier flicks. International sales also played a role; overseas moviegoers are used to paying for 3-D eyewear. Stateside, the company may have to eat the cost of distributing 3-D glasses in the wake of Sony's (NYSE: SNE ) deciding it will no longer support RealD eyewear subsidies for its films, which includes July's The Amazing Spider-Man.
Don't leave before the end credits
Still, supposing that RealD's technology is meaningfully additive, and the involvement of 3-D expert and Avatar director James Cameron as a board member suggests that it is, Sony's rebellion shouldn't matter over the long term. The company's installed base of 19,700 digital screens worldwide represents about a third of the current addressable market, which could grow from 60,000 to well more than 100,000 screens as theater owners upgrade from celluloid to digital.
In the more immediate future, RealD should benefit from no longer having to account for options-related revenue reductions in Q4 as outsized box office numbers result in good or even great first-quarter guidance. Call it a powerful one-two punch befitting the superhero summer The Avengers kicked off on May 4; one worthy of an outperform CAPScall on RealD shares, I think.
And yet, as disruptive as 3-D filmmaking technology could become, neither RealD nor IMAX qualifies as The Motley Fool's top stock for 2012. Which name does? An unknown but highly profitable international retailer. Find all the details here.