Is IMAX a Buy?

There was a little vulnerability among IMAX (Nasdaq: IMAX  ) shareholders earlier this month, when joint-venture partner AMC pulled back the red curtain on its own beefed-up screen.

AMC's decision to open its first ETX (enhanced theater experience) screen in Disney's (NYSE: DIS  ) Downtown Disney complex in Florida was a rude awakening for IMAX moat watchers.

After all, AMC has spent the past two years converting roughly 100 of its multiplex screens into IMAX-branded experiences. Why go it alone, unless it was tired of splitting the gate with IMAX after the studios take their generous cuts?

AMC timed the ETX debut perfectly. It was the opening weekend of Disney's Alice in Wonderland. The 24-screen multiplex happens to be part of the Walt Disney World resort, a place with no shortage of mouse-eared buffs. A Disney vacation also isn't a diversion for the thrifty, so paying $14 for an ETX screening in 3-D -- instead of $13 for a conventional 3-D showing or $10 for a flat 2-D experience -- isn't a very taxing decision.

In other words, AMC's decision to introduce ETX in a tourist hotbed may be a sound financial decision, but it will do nothing to verify whether AMC can make it on its own in the suburban shopping centers where most of its screens are located.

Will studios flock to digitally remaster their films the way they do for IMAX? Will AMC ever reach a global network of hundreds of branded screens? Now that Avatar has wowed $218 million worth of IMAX moviegoers, is there really room for exhibitors to consider a box-office-padding premium outside of 3-D and IMAX conversions?

IMAX took a hit after the ETX rollout, but was hitting highs last seen 10 years ago a few days later -- when IMAX reported another blowout quarter.

Fade to black
After three years of stumbling through red ink and single-digit stock prices, IMAX has broken the mold. Revenue in its latest quarter skyrocketed 98% to $54.2 million. The cinematic enhancer delivered a profit of $0.06 a share -- or $0.20 a share on an adjusted basis -- after positing a deficit during the previous year's fourth quarter.

Skeptics will point to Avatar as the workhorse, but they would be missing the point. The film didn't hit the big screen until mid-December. Just $54.2 million of the $218 million in IMAX ticket sales took place during the tail end of the fourth quarter. The real Avatar mother lode will come during the current quarter. And after seeing Avatar forcefully hand over the baton to the IMAX send-up of Alice in Wonderland with aplomb, it's not a stretch to say that News Corp.'s (NYSE: NWS  ) blockbuster James Cameron flick has whetted moviegoer appetites for more IMAX experiences.

Big screens and bigger value
IMAX's shares may have appreciated sixfold since bottoming out 16 months ago, but this is also a company whose fundamentals improve with every passing quarter. Three months ago, analysts figured that IMAX would earn $0.50 a share this year. Wall Street is now targeting a profit of $0.70 a share this year -- and $0.78 a share come 2011. In short, this is a growth stock trading just shy of 20 times next year's projected net income.

IMAX has installed hundreds of its screens around the planet (digital and otherwise), but one of the real game-changers has been its joint-venture deals with major multiplex operators including AMC and Regal (NYSE: RGC  ) , which will lead to bigger royalties from box-office and concession receipts.

A popular argument against IMAX comes from couch potatoes who have built out their home theater systems. They no longer need to drive out to the multiplex when they can buy the Blu-ray disc a few months later or wait even longer until Netflix (Nasdaq: NFLX  ) eventually streams more of its catalog to its subscribers.

It's a nice theory, but movie theaters just closed on a record year despite the pesky recession. Premium cinematic experiences are helping to drive exhibitor traffic, as evidenced by the final weekend in January, when IMAX brought in 21% of stateside Avatar ticket sales despite accounting for just 2% of the total screens.

Besides, it's not as if IMAX is turning its back on the homeys. It's in the process of teaming up with Sony (NYSE: SNE  ) and Discovery (Nasdaq: DISCA  ) in launching what may be the first 3-D channel later this year -- just as the first 3-D television sets hit the market.

I may have been fashionably early in recommending IMAX to Motley Fool Rule Breakers newsletter subscribers nearly five years ago, when it was in the single digits. It meandered in that pricing range for far too long. However, now that IMAX has broken out -- with its fundamentals improving with every new IMAX installation and every digitally remastered Hollywood blockbuster -- the future couldn't be brighter for the stock, which is more than reasonably priced given its game-altering upside.

There's higher ground ahead, even if one has to go down Alice's rabbit hole to get there.

Is IMAX a buy or not? Share your perspective in the comment box below.

Walt Disney is a Motley Fool Inside Value selection. IMAX is a Motley Fool Rule Breakers recommendation. Walt Disney and Netflix are Motley Fool Stock Advisor selections. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz doesn't like the way he'd look blown up on an IMAX screen. He owns shares in Disney and Netflix. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy, and it looks smoking hot on one of those eight-story IMAX screens.


Read/Post Comments (10) | Recommend This Article (16)

Comments from our Foolish Readers

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 March 18, 2010, at 1:30 PM, biolasteve wrote:

    I was a total IMAX skeptic (the theater, not the stock) for the longest time, until I saw Avatar. It was like what my parents described the first Star Wars being like, just a totally new, uncategorizable experience. Now I'm a total convert, totally open to paying a couple bucks more for the IMAX experience. Just anecdotal, but that's my two cents worth...

  • Report this Comment On March 18, 2010, at 2:17 PM, RevenueVenue wrote:

    I agree, a real IMAX experience is something to behold. For certain movies, especially Avatar, it is the only way to see it. Key word being "real". For those who haven't heard all the hoopla in the last year regarding the shameful, slightly larger screens that are being advertised as IMAX theaters, its real easy find (http://destroyfakeimax.blogspot.com/ - Check out the "Real/Fake IMAX map"). Lots of people angry over having to pay for something they are not getting. However, I still think its easy to say that the majority of movies don't require the IMAX experience. Who needs to have a visual orgasm over The Blind Side? I am honestly curious how this all might translate with stock prices.

  • Report this Comment On March 18, 2010, at 2:23 PM, RevenueVenue wrote:

    I agree. For certain movies, especially Avatar, IMAX is the only way to see it. However, I think its still safe to say that for the majority of films that are released there will not be a huge demand for IMAX. Who wants/needs to have a visual orgasm over The Blind Side?

    Besides all that, incase some of you haven't heard all the hoopla in the last year about the shameful, slightly larger screens being called IMAX its real easy to find info on it. (http://destroyfakeimax.blogspot.com/ - check out the "Real/Fake IMAX Map"). Lots of people angry over having to pay for something they are not getting.

  • Report this Comment On March 18, 2010, at 2:25 PM, RevenueVenue wrote:

    Sorry for the double post...didn't see it when I hit post. (new here)

  • Report this Comment On March 18, 2010, at 2:26 PM, Clint35 wrote:

    It's definitely a buy. I've already a small profit buying and later selling Imax shares. If I wasn't broke I'd be buying more right now. I think they're just getting started.

  • Report this Comment On March 18, 2010, at 2:40 PM, jerome7777 wrote:

    I think IMAX will be a takeover target and why not. All the major movie companies have seen the huge success of IMAX but they have to share revenues with IMAX. Why not buy IMAX and have this all to your own and collect 100% of ticket sales etc! I know there are other 3-D newbies coming out the woodwork but the IMAX name has hit huge recognition level that will swallow up any competition for a long time.

  • Report this Comment On March 18, 2010, at 3:57 PM, souladventurer wrote:

    Imax will continue to spread in popularity. All the people that Avatar drove into Imax then got to see the previews for Alice and drove that to two outstanding openings - actually generating more Imax ticket sales in a weekend then Avatar did. The previews shown during Alice were for films many might not normally have seen in the theaters, but the 3D world makes the films worth seeing for the experience alone. Look for Imax to beat all earnings predictions over then next three quarters. And likely beyond.

  • Report this Comment On March 19, 2010, at 8:35 AM, futuresboy wrote:

    Lets not forget the mobile units at a mere $1 million per 450 seat theatres.

    Just one more blockbuster with sold out theatres like Avatar recoups the investment in 6 months!!!!!. Then, its pure profit after mobile operations for each quarter thereafter.

    Ay Caramba! They may as well just print money at IMAX!

  • Report this Comment On March 22, 2010, at 9:02 AM, philthyTrades wrote:

    While many say Avatar was IMAX's bread and butter, it is reasonable to predict that many producers, writers, etc will be inspired to follow suit - Avatar is only the beginning and movies will be made in the manner to be visually stunning via 3D, and it makes sense seeing the success of Avatar and the future technology in TV (HD 3D).

    Also, management is doing a great job of expansion and diversifying globally - opening new theaters in places like China.

    Long term potential.

  • Report this Comment On March 25, 2010, at 3:54 PM, JCandTheJuice wrote:

    I bought a ton of IMAX at $4 a share just towards the end of last year... It's hit $17 today... Hmmm. No one in my family listened to me when I said to buy, and I only did this on a whim.

    I've quadrupled in value and ready to find the next big stock!

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