Lights Dim in Anticipation at IMAX

The lights went dark in IMAX (NYSE: IMAX  ) theaters in the first quarter, but the company is sweeping the aisles and buttering popcorn to prepare for six new features in the second quarter.

A year after Avatar pushed IMAX into the mainstream and gave the company momentum to sign new theaters, a slow quarter resulted in a big drop in revenue and earnings. Total revenue fell 40% to $45.2 million in the quarter, and earnings per share fell from $0.40 to a loss of $0.02 per share. Adjusted earnings per share fell to $0.04 below the $0.11 analysts expected.

All of this normally means a stock gets pummeled, but IMAX was up 6% yesterday because the company is accelerating growth plans. After signing 101 new theater deals in the first quarter, it was time to step up from 80-90 installations a year to 115-125 for 2011. Since theaters are the cash cow of IMAX, the faster the company can install theaters, the better.

This is where 3-D competitor RealD (NYSE: RLD  ) has been ahead of the game, already installing 11,300 screens to end 2010. Instead of taking installations slow and steady as IMAX has, RealD built out as many theaters as possible to capture market share. But IMAX captures far more value per theater, so if it can grow the number of theaters at a faster rate, it will capture much more of the value in blockbuster films.

Blockbuster summer
In the next two months, we have some big movies coming to IMAX that should drive results. Disney's (NYSE: DIS  ) studios are releasing Thor, Pirates of the Caribbean: On Stranger Tides, and Cars 2 in the quarter. Comcast's (Nasdaq: CMCSA  ) Universal Pictures has Fast Five, while Viacom's (NYSE: VIA  ) subsidiary Paramount has Super 8 and is distributing Dreamworks' (Nasdaq: DWA  ) Kung Fu Panda 2. That's an exciting lineup of films for one quarter, and IMAX should capitalize on having more theaters than originally anticipated.

Foolish bottom line
The quarter may have been a disappointment, but faster growth of IMAX theaters is a positive for shareholders. Shares are becoming expensive at 64 times trailing earnings, but considering the operating leverage IMAX gets from adding screens and growth opportunities internationally, I'm not eager to sell shares today.

Click here to add IMAX to My Watchlist, which will find all of our Foolish analysis on the stock.

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 pick. Walt Disney and DreamWorks Animation SKG are Motley Fool Stock Advisor recommendations. 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 (2) | Recommend This Article (8)

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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 April 29, 2011, at 4:07 PM, Gonzhouse wrote:

    To figure out how IMAX stock will perform you need to look at the 2 things that drive earnings: theatre signings and event-movies (like Avatar).

    Theatre signings are unpredictable, although you can spot growing momentum in successive signings. Event-movies are much more forecastable. IMAX has a strong Summer coming up but things slow down in August thru November as no blockbusters are (yet) scheduled. December 2011 is going to be huge with Tintin and Mission Impossible.

    Buy Jan 2012 Calls in September (before earnings announcement) is a good play on this thesis.

  • Report this Comment On May 01, 2011, at 10:39 AM, therealguru wrote:

    64 times trailing twelve month earnings? I mean is this a joke? They made 1.50 in earnings last year which puts the P/E(ttm) at 23.5 They are expected to make 1.09 this year so the P/E is just below 35, still no where near your "65" statement. Although we may see IMAX trade with a 65 P/E in the future :)

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