The Best Stocks for 2011: IMAX

This article is part of our "Best Stocks for 2011" series where our Foolish writers pick their top stock ideas for the year ahead. Click here to see a review of last year's picks and our 12 recommendations for the year ahead.

When looking for a great stock, I have three simple criteria: I want a story I can believe in, a business I think will be around for the long haul, and a price that doesn't make me cringe.

For 2011, the company that fits the bill is IMAX (Nasdaq: IMAX  ) . IMAX has proven over the past year to be a lasting business and is expanding its core business while investing in opportunities for the future.

The IMAX experience
I really started noticing IMAX's differentiation when Avatar was released just more than a year ago. The cinematic masterpiece took 3-D to another level and gave movie buffs a reason to demand a premium experience. But I fully expected the hype to die down as less extravagant movies started to hit theaters.

But IMAX has proven to be more than just a one-hit wonder, and the icing on the cake was the opening of Tron: Legacy, in which IMAX took 24% of the opening weekend domestic box office. My proxy for IMAX demand has been its percentage of domestic opening weekend box office. Below are a few of the more notable movies in 2010 that show that IMAX is still in demand.

Movie

Domestic IMAX Theaters

Percent of Opening Weekend Box Office

Avatar 178 13.0%
Alice In Wonderland 188 10.5%
Inception 197 11.5%
Tron: Legacy 234 24.0%

Not every film is right for IMAX, but IMAX can hand-pick the movies it releases and schedule them to be released every few weeks throughout the year. This assures IMAX of capturing the most valuable weekends of each blockbuster movie.

But the real beauty of IMAX's business model is the ability to take a piece of the box office from both studios and theaters. The company digitally remasters each movie for IMAX and in turn takes a cut of every ticket sold from the studio. Then, in joint venture theaters -- where IMAX is focusing on expansion -- the company takes another cut from the theater for the use of IMAX's equipment. So, every new theater is like a new money tree just waiting to be picked.

Everyone is excited about IMAX
In 2010, theaters have been excited about IMAX, signing up for 201 new outlets. After closing 2009 with 288 IMAX theaters, the company anticipates ending 2011 with 444-461 theaters. And in case you were wondering if IMAX was pulling the wool over new customers' eyes, 85% of this year's signings are with operators like Regal Entertainment (NYSE: RGC  ) that already have IMAX theaters.

And IMAX is just starting to scratch the surface of international expansion. The company has just more than 100 commercial IMAX theaters and estimates that a potential 800 theaters could be built.

Studios are excited about IMAX as well, with Disney and Dreamworks among the regulars in IMAX theaters. Warner Brothers Pictures, a unit of Time Warner (NYSE: TWX  ) , even signed on for up to 20 releases in IMAX through 2013.

I know what you're thinking. ReadD (NYSE: RLD  ) has more theaters and more box office revenue, so why shouldn't I invest there? Not all theaters are created equal, and despite having 9,300 theaters last quarter, RealD's film revenue was $3.7 million less than IMAX's film revenue from 470 theaters. Overall, IMAX screens have had 4.6 times the box office of other screens.

Beyond the theater
With IMAX theaters clicking on all cylinders, the company needs to expand beyond the theater to augment growth. This year, management proved that IMAX has seen the future -- and it starts in the living room. IMAX signed on with Sony (NYSE: SNE  ) and Discovery Communications (Nasdaq: DISCK  ) to make a 3-D television network that will launch early in 2011. The channel will feature original series, content from Sony, as well as IMAX features like Into The Deep 3-D and Magnificent Desolation: Walking on the Moon 3-D.

IMAX also made a strategic investment in Laser Light Engines this year alongside Harris & Harris (Nasdaq: TINY  ) , and it plans to make similar investments in 2011. The Laser Light investment will help IMAX create a light source that is brighter, enhancing 3-D pictures even further.

If you build it, they will come
Additional screens and the success of Avatar have helped IMAX's revenue jump 48.1% over the past year, and 2011 will see additional revenue from 75-85 more screens.

IMAX is reasonably priced with a forward multiple of 23.2 and has beaten estimates two of the past three quarters. Analysts are even starting to come around on the IMAX story by raising estimates for the current quarter and 2011. I'm a big fan of companies that can beat expectations and keep analysts scrambling to raise estimates further.

With studios, theaters, and customers buying into the IMAX experience, I think this stock is the best pick for 2011. Has this Fool fallen off his rocker? Let us know in the poll below.

Which is the best stock for 2011? See all 12 candidates here.

Fool contributor Travis Hoium owns shares of IMAX. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

IMAX is a Motley Fool Rule Breakers choice. Discovery Communications is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (18)

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 December 30, 2010, at 12:59 PM, cadunce wrote:

    You haven't fallen off your rocker, you are just extremely late to the party. This analysis would have been better and more appropriate at this date on 2009 instead of 2010.

  • Report this Comment On December 30, 2010, at 1:04 PM, EnigmaDude wrote:

    I think the party was just starting in 2010. IMAX will keep on rocking right into 2012!

  • Report this Comment On December 30, 2010, at 1:21 PM, TMFFlushDraw wrote:

    @cadunce

    You are absolutely right. The problem is I wasn't with Motley Fool back then, but I have been high on IMAX since I started in July so I was as early as I could be.

    May all your stocks be winners in 2011,

    Travis Hoium

  • Report this Comment On December 30, 2010, at 3:25 PM, don1941t wrote:

    I've been holding since this time last year and enjoyed the ride so far. I believe it's a 10-bagger by 4Q13.

  • Report this Comment On December 30, 2010, at 7:34 PM, RealSKS wrote:

    I've been in since Nov 2007, it may had been a Fool article that sparked my interest back then. I took my original money and then some out this year and is letting the rest ride.

  • Report this Comment On December 30, 2010, at 10:09 PM, bebop111 wrote:

    However, other writers have been talking about disappointing sales of 3-D TVs--this could be a problem if they're over-reliant on it. Still, you gotta like the alliances they're forming!

  • Report this Comment On December 31, 2010, at 8:53 AM, Chriswayne wrote:

    It looks like Sony knows a hit when it sees one too. Maybe a $40 bid for Imax stock???

  • Report this Comment On December 31, 2010, at 10:35 AM, wjcoffman wrote:

    Will IMAX come to the home theater? There were so many people texting in the movie theater and that continuous small screen illumination was incredibly distracting/annoying. It really stunk to pay $9.50 for a regular movie and have that going on - I can't imagine paying more for the IMAX experience and having to live with that junk! How is it you go to a movie with 3 or 4 of your supposed friends and spend that much time texting, not to mention that you (ok, maybe mommy or daddy) paid that much for entertainment?

    Approaching 50 and truly not in touch I guess.

    LONG: DWA

  • Report this Comment On January 07, 2011, at 6:41 PM, hanover67 wrote:

    I like the IMAX theatre growth trajectory - more theatres, more revenue, more EPS. I wish that "Unstoppable" was in an IMAX theatre near me. Plus, I'm a senior and i get a discount...

  • Report this Comment On January 08, 2011, at 2:00 PM, Fool wrote:

    Travis,

    Great pick, and I share your opinion that IMAX is in the right place for phenomenal growth over the next several years.

    There has been some recent chatter about a potential IMAX buyout by either Disney or Sony. Do you have a take on this, or is it just another Wall Street rumor?

  • Report this Comment On January 09, 2011, at 7:34 PM, TMFFlushDraw wrote:

    The buyout rumors didn't really make any sense when they came out (as analysts and many stock websites said) and I don't see IMAX as a buyout target in the future (unless a company like DLB goes after them).

    Part of the beauty of the IMAX business model is being able to leverage their theater experience with all of the studios. How excited would Disney be about paying to use Sony's theaters or visa versa?

    Will IMAX make it to the home theater? I wouldn't doubt it but we have a long way to go before that's a big market. With that said, it's these kind of growth options I like from IMAX. The 3D channel is another one of these growth engines. In 5 years this will be a much more prevalent brand than it is now.

    Travis Hoium

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