Count me among those who are less than awed by the vision that high-tech movie-projection company IMAX (NASDAQ:IMAX) is presenting. We've all heard the story behind this stock: Traditional theater companies such as Regal (NYSE:RGC) are hurting because of the dramatic increase in high-quality home-theater systems, and the amazing picture quality and screen sizes available in IMAX theaters will provide a reason for people to come back to the movies. All the company needs is enough time to get up to where the economies of scale start working, so the argument goes, and then watch out, world.
Unfortunately, we've heard that song and dance before. Wasn't Sony's (NYSE:SNE) Betamax technology visibly superior to VHS? Yet the higher costs and shorter tape length of a Betamax player led to a lower adoption rate and a much quicker technological demise. For many households, it's the ever-escalating cost along with the lousy quality of the movies being offered, not at-home big screens, that are keeping folks out of the theaters.
Film quality -- not just picture quality
Face it -- on either the regular screen or on high-impact IMAX, nobody wanted to pay real money to see Gigli or The Adventures of Pluto Nash. With the costs of attending an IMAX flick even higher than seeing the same picture at a standard cinema, the IMAX-enhanced picture has to be all that much better in order to fill seats. While a few success stories come to mind, including Batman Begins and The Polar Express, it takes more than a handful of well-adapted movies to sustain profitable growth.
Of course, things aren't all bad at IMAX. After all, it's a Motley Fool Rule Breakers pick, and the company recently announced that it would likely meet or beat expectations. Even so, I'd suggest taking that notice with a grain of salt. A quick look at its financial track record over the past few years indicates a troubling sight:
| Year | Revenue | Shares Outstanding | Revenue Per Share | RPS Growth (Y/Y) |
|---|---|---|---|---|
| 2001 | $117,669,000 | 31,899,114 | $3.69 | N/A |
| 2002 | $129,102,000 | 32,973,366 | $3.92 | 6.1% |
| 2003 | $119,260,000 | 39,301,758 | $3.03 | (22.5%) |
| 2004 | $135,980,000 | 39,446,964 | $3.45 | (13.6%) |
| 2005 (E) | $150,000,000 | 40,208,743 | $3.73 | 8.2% |
In a nutshell, very little of the company's growth is actually finding its way to the outside shareholders. While revenue is up from 2001 through 2005, on a per-share basis, the company has barely treaded water. That's an awful long time to go nowhere. Worse yet, at a recent market price of $9.81 per share, it's trading at more than 2.6 times the high end of its expected revenue, not to mention 25.8 times the high end of its expected earnings. That's a fairly steep premium, given its anemic growth rates.
How steep? Well, consider this table of companies that have the following characteristics:
- Cheaper price-to-earnings and price-to-sales ratios.
- Faster revenue growth rate than IMAX's recent per-share revenue growth rate.
- Recently declining number of shares outstanding.
| Company | Trailing P/E | Trailing P/S | Trailing Rev. Growth | Y/Y Share Count Change |
|---|---|---|---|---|
| Accenture (NYSE:ACN) | 20.7 | 1.6 | 12.53% | (4.77%) |
| Home Depot (NYSE:HD) | 17.97 | 1.23 | 11.52% | (3.09%) |
| Nike (NYSE:NKE) | 21.59 | 1.8 | 9.66% | (0.95%) |
| Outback Steakhouse (NYSE:OSI) | 22.03 | 1.17 | 12.49% | (1.14) |
| Service Corp. | 15.2 | 1.33 | 15.41% | (2.99) |
That's quite a collection of companies that are both cheaper than IMAX and have demonstrated faster shareholder-visible growth than IMAX. In fact, the first two on that list were so attractively priced at one point that they were made Motley Fool Inside Value selections. It says something about a so-called "growth" company like IMAX when proven value plays such as Accenture and Home Depot are actually delivering faster shareholder visible growth. Notice, too, that the list contains death-care company Service Corp. There's something ominous in that fact, especially when you realize that the IMAX story hasn't been without its share of theater shutdowns.
The Foolish bottom line
Cold, hard cash in hand always beats unfulfilled promises. As a value-focused investor, I'd rather put my money in companies that have proven growth track records, owner-friendly financials, and value-priced shares. Unless its next disappointment knocks some value into IMAX's shares, this is one story I'll be content to just watch from the cheap seats.
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Think you're done with the Duel? You're not! Go back and read the other three arguments, and then vote for a winner.
At the time of publication, Fool contributor andInside Valueteam member Chuck Saletta had no ownership stake in any of the companies mentioned in this article. The Motley Fool has a disclosure policy.
