If IMAX (NASDAQ:IMAX) had to stumble, you just knew it would be in a bigger-than-life dramatic fashion fitting for its gargantuan screens. That disastrous moment came Wednesday night for IMAX, when the company posted better-than-expected results for its quarter that ended in June but then deflated buyout hopes in a single paragraph in the earnings press release.
"While we are surprised that the high level of interest we initially saw has yet to result in a partnership or acquisition, we are committed to fully exploring all options open to the Company, including those offers that did not meet the Board's original valuation parameters," said IMAX Co-Chief Executive Officers Richard L. Gelfond and Bradley J. Wechsler. "We remain committed to ensuring that any transaction is strategically or financially compelling and delivers the most value possible to our shareholders."
I know what you're thinking. Are we to believe that the two executives sharing the CEO hat are joined at the hip and speak in sync? I've interviewed Gelfond in the past. He can speak for himself, and I think Gelfond and Wechsler should have drawn straws to see who gets tagged with making the weighty statement.
Anatomy of a breakdown
Since March's announcement that the company was exploring strategic alternatives, the possibilities were plentiful and tantalizing. Further fueling the optimistic fire was a story that ran in Toronto's Globe and Mail two weeks ago that detailed a second round of buyout offers from four different entities, including two private-equity firms, a South Korean movie theater chain, and Sony (NYSE:SNE).
The story also cited an analyst projecting an ultimate buyout offer between $12 and $14 a share. It wasn't much of a premium for a stock trading just shy of the $10 mark, but it would have been a lucrative short-term exit strategy if it had panned out that way.
Obviously, it didn't.
There was one last glimmer of hope yesterday, when the company announced that it was bumping its quarterly conference call from the morning to the afternoon. Was the company running a fine-toothed comb over a winning bid? Did it need an extra trading day to fly in the buyer for a joint conference call?
The rocky trading leading up to the actual announcement was foreboding. Volume was 10 times greater than on the company's typical trading day, yet the stock closed marginally lower. In other words, the only force greater than investors looking to buy in before a potential buyout announcement was the flood of sellers -- who may or may not have known that something was up -- barreling for the exits.
A little more salt, please
The stock shed a third of its value in after-hours trading last night as a result of the botched buyout and the revelation that the SEC had initiated an informal inquiry into the company's revenue recognition practices. It was a bloody one-two punch that made a strong quarter out of IMAX seem almost meaningless.
Almost. If IMAX is going to be unloved by potential suitors and have its bean counters smacked around, the actual numbers are clearly important to investors who now have to weight the company's prospects as a standalone entity.
For the quarter, IMAX profits from continuing operations quadrupled to $0.08 per share. Revenues soared 34% higher to hit $41.4 million. Analysts had been expecting the company to earn only $0.07 a share on a 29% top-line uptick. New theater orders continue to pour in, and even though quarterly performances will fluctuate based on the timing of new installations, the company continues to grow as consumers show they have no problem paying a premium for an IMAX theatrical experience. Theater and entertainment-center operators all over the world are ringing up IMAX for its systems as a result. There are currently 274 theaters installed in 38 different countries.
Lumpy quarters force us to size up IMAX one year at a time to smooth out the extremes. That's a practice that also helps tackle the SEC's concern, because the allegations aren't that IMAX is booking bogus revenue as much as simply booking it a quarter or two prematurely.
| Year | Earnings Per Share | Revenues |
|---|---|---|
| 2004 | $0.26 | $136 million |
| 2005 | $0.40 | $144.9 million |
| 2006 (est.) | $0.42 | $164.1 million |
| 2007 (est.) | $0.62 | $185.7 million |
That's respectable growth, especially for a company that, as a swinging single after last night's knockdown, is trading at roughly 10 times next year's earnings. IMAX may be just fine as a standalone company.
Want to feel even better about owning IMAX at this point? The day before IMAX announced that it was going on the block, its shares closed at $9.50. Based on last night's drubbing, the shares stand to appreciate by 50% just to get back to where they were before the buyout buzz lifted the shares higher in March.
Would things be better if IMAX had a more financially potent parent with a thicker Rolodex? You bet. The company's balance sheet has never been its strong suit, and one can only imagine how much quicker IMAX could build out its network of screens if it had the financial fortitude to ramp up expansion or bankroll more of its own screens along with multiplex joint ventures.
A buyout is still possible. It may even be necessary at this point, now that upset shareholders will rattle the cages until the company is lighter by the weight of two CEOs. We may not know the value of the offers that IMAX once thought were too weak to win its hand, but it would be unthinkable in this fire sale to turn down an offer in the $9 to $11 range.
IMAX works, but now isn't a moment to be picky or proud, no matter how many chieftains you can get to speak at the same time.
IMAX was recommended last summer to Motley Fool Rule Breakers newsletter subscribers. You can read the original recommendation and have access to all of the growth stock picks with a free trial subscription.
Longtime Fool contributor Rick Munarriz loves to spot great things early. That's why he's been with The Motley Fool since 1995. He does not own shares in any of the companies in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
