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.
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.