Once IMAX (NYSE:IMAX) built a business model that could provide consumers with a superior moviegoing experience and studios with superior products, it was off to the races for the company's revenue and stock. Since 2009 the company's revenue has about tripled, and during that time the stock is up six times on the market.
But can the run continue?
A business built to last
IMAX stands above other premium theater options with a combination of quality, brand, and geographic reach.
Unlike most other film formats, the company partners with movie studios to optimize films for IMAX, even shooting with IMAX cameras in films such as The Dark Knight Rises and Mission Impossible: Ghost Protocol. Director Christopher Nolan is one of IMAX's biggest fans because the screens are taller, higher resolution, and twice as bright as a normal screen: "The sharpness and the depth of the image, projected onto those enormous screens, is simply the best quality image that has ever been invented," he said in an interview with The New York Times.
The consistent quality allows IMAX to build a brand that people recognize, allowing for higher prices for movie tickets, which benefits studios, theaters, and IMAX. The partnership benefits only improve as more high-quality IMAX content is released on a broad scale.
You can't take advantage of box office premium pricing without a large theater network, and that's where IMAX has focused in the last few years. It ended 2010 with 518 theater systems and grew that to 767 by the end of the second quarter of 2013. That expansion, and a better understanding of what movies work in IMAX, has allowed the growth you see in the chart above.
The final piece of the IMAX puzzle is the films themselves. Quality and differentiation can only go so far without a great movie. This may be IMAX's biggest improvement over the past three years, eschewing children's films and other non-action films for high-value action blockbusters that will benefit from IMAX. This year's highlights include Iron Man 3, Thor: The Dark World, and The Hunger Games: Catching Fire, all of which will likely take an outsize percentage of box office in IMAX.
Those factors drive the company's performance long term, but a great business model doesn't necessarily make a great stock.
Is the stock a buy?
The challenge for investors is finding the value in IMAX's shares. Box office revenue growth was 27% last quarter to $219.7 million, translating into $26 million in digital remastering revenue. That's solid growth, but given the stock's P/E ratio of 37 and a market cap approaching $2 billion, there's already a lot of growth priced in.
I think IMAX will continue to grow along with its network and box office hits, but I think shares are fully valued right now. I'd like to see shares pull back 30% or more before I see this as a great value, meaning I'm not a buyer today.
Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends IMAX. The Motley Fool owns shares of IMAX. 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.