Like RealD, IMAX Will Rise, Too

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Is IMAX (Nasdaq: IMAX  ) as good as or better than RealD (NYSE: RLD  ) as an investment? Some of you are wondering what I think.

The short answer is yes. IMAX is a great business, and like RealD, a worldwide growth story; one that we like very much at Motley Fool Rule Breakers.

The long answer is also yes, but it's not as simple as one business being better than the other. IMAX owns hundreds of screens and has joint venture arrangements for many more. RealD licenses its 3-D cinema technology to theater operators, taking a chunk of the box office receipts in exchange.

Thus, while RealD is now showing on more than 20,000 screens worldwide, the IMAX network recently eclipsed 500 screens with 250 more in its backlog. Management expects to grow its footprint by more than 100 additional screens each year. Both companies are experiencing tremendous growth.

A lower barrier
If IMAX has an edge, it's that you don't have to believe in 3-D to believe in IMAX. The Hunger Games drew sellout IMAX crowds in March on 2-D screens. Next month's The Dark Knight Rises, the finale in Time Warner's (NYSE: TWX  ) Batman trilogy, features several scenes shot in IMAX but not 3-D.

Director Christopher Nolan has twice wowed audiences without using 3-D. Batman Begins generated $372 million worldwide, while the 2008 sequel, The Dark Knight, earned $1 billion at the global box office. Actor Heath Ledger earned a posthumous Best Supporting Actor Oscar for The Dark Knight. And of course IMAX took home plenty of gold for its role in bringing both flicks to the big screen.

Interestingly, investors appear to be ignoring this bit of history. Shares of IMAX are off 6% since May 4, when Walt Disney's (NYSE: DIS  ) The Avengers first reached U.S. audiences. RealD is up more than 22% over the same period, yet both companies will profit from the success of the superhero team-up.

3-D is still better than you think
Indeed, with so many theaters now RealD-ready, there's plenty of incentive for theater operators to take chances on 3-D hits such as The Avengers. The superhero team-up has become a blockbuster on track to generate $600 million at the U.S. box office, making it the third-highest-grossing domestic film of all time thanks to premium screenings in 3-D and IMAX. Worldwide, The Avengers has generated $1.42 billion in box office receipts.

What's more, if The Amazing Spider-Man -- which is getting good reviews for how it uses 3-D to enhance powerful action sequences -- proves to be a hit, action fans could demand more digital features shot in 3-D rather than translated later (as is usually the case now).

For the most part, RealD's riskiest days are behind it. An options overhang related to appeasing studio partners has long since been accounted for. And 3-D glasses, once a cost center that cut profits by tens of millions annually, now give a modest boost to the bottom line.

But of the two, IMAX is the more mature, more stable business. Each theater upgrade or install comes at a fixed cost so that profits multiply over time. Gross margin now stands at about 48%, up 10 percentage points since 2007. Further gains seem likely as the theater network expands and more joint venture deals get signed.

So IMAX or RealD? I'd take both, honestly. I've yet to make a real-money bet on IMAX as I have RealD, but I believe in this business enough to make an outperform CAPScall on the stock, which I did this morning.

Now playing: Rebels with a cause
Do you think I'm right? Wrong? Either way, it pays to study disruptions in the making because the market tends to reward rebels such as IMAX and RealD. These are the sorts of companies that we look for in our Rule Breakers newsletter service. Want in? Check out a 30-day trial subscription. If that's not up your alley just yet, you can still check out a free special report detailing the next trillion-dollar revolution.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Time Warner and Walt Disney, and had a short-term call options position in RealD, at the time of publication. Check out Tim's web home, portfolio holdings, and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services have recommended buying shares of IMAX and Walt Disney. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 25, 2012, at 3:33 PM, TMFMileHigh wrote:


    A generous reader pointed out some errors I made in the story above. Here's the text:


    FYI, Imax Corporation owns or manages six theaters, not hundreds.

    They are:

    Great Clips IMAX at Minnesota Zoo, Apple Valley, MN

    New England Aquarium, Boston

    Navy Pier IMAX Theatre, Chicago

    Indiana State Museum, Indianapolis

    Esquire IMAX Theatre, Sacramento

    IMAX Theatre at Palisades Center, West Nyack, NY

    It has joint-venture deals with exhibitors for "376 systems with 22 partners, 257 of which were in operation as at December 31, 2011," according

    to its latest 10-K filing."

    Hope this helps, and thank you to James Hyder for setting me straight.

    Foolish best,



    Tim Beyers

    TMFMileHigh, Motley Fool Rule Breakers Analyst, Supernova Odyssey I Portfolio Contributor


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