The Motley Fool Rule Breakers growth investing service has been making buy and sell recommendations for members since 2004. Now it's time for those members to help shape the service, through the "Take That!" contest currently under way. Readers nominated the companies they thought were no longer Rule Breakers and that should be sold from the scorecard, and the five best bear cases are now up for a vote. The winning (losing!) stock will be revealed in the next issue of Rule Breakers -- and quite possibly a sell recommendation to go along with it!

I recommended IMAX (NASDAQ:IMAX) to subscribers of our Motley FoolRule Breakers growth investing service during the summer of 2005. The company seemed to be the ideal disruptor at the time. While conventional multiplex cinemas were heading into their third straight year of attendance declines, IMAX was booming in popularity. New screen orders were pouring in from all over the world. Thanks to a proprietary remastering technology, IMAX was able to show more robust versions of current Hollywood blockbusters on its bigger-than-life screens that are sometimes as big as eight stories tall. It has given major motion picture studios like Time Warner (NYSE:TWX) and News Corp.'s (NYSE:NWS) Fox some welcome incremental box office action.

As far as picture shows go, the IMAX story has proved to be a reel dud. Even though the company continues to grow its presence, shares were halved earlier this year when the company announced accounting irregularities and that its move to sell the company hadn't panned out at the price points it found acceptable.

So is it time to pull the curtain on IMAX, or is it just the ideal time to pick up a proven player at a bargain price that may still get snapped up at a premium?

We're bullish!
In my original write-up, I relished the company's positioning in an otherwise sluggish sector. "IMAX surveys show that people were willing to drive an average of 20 miles -- and pay $3 to $4 more -- to experience a celluloid hit on IMAX over the standard cinema screen," I wrote at the time. "It's the cure to home-theater addictions, and the struggling operators realize this."

IMAX was signing deals left and right. At the time, it had inked deals for more new screens over the past year than in any period since 1997. The company was also rolling out a slightly smaller MPX version that would allow flummoxed multiplex operators the ability to transform one or more of their screens into an IMAX offering. It found willing partners like AMC to give it a shot.

Then we had the company's improving financials. After a rocky past, the company had earned $0.26 a share in 2004, and analysts felt the company was on its way to earn $0.37 a share come 2005 and $0.46 a share in 2006.

"Whether it's the savior of the multiplex or the feel-good field trip experience, IMAX is doing well and it's going to be doing even better in the future," I wrote.

I seemed to be on the mark at first. Earnings for all of 2005 clocked in at a better-than-expected $0.40 a share. It also created a speculative stir when it announced that it was putting itself up for sale.

It felt right, even as published reports had at least four suitors sniffing around IMAX, including Sony (NYSE:SNE). Then the company dropped the major bombshell on its investors in early August when it announced that it did not receive adequate buyout offers and that the SEC was investigating revenue recognition practices in which the company was booking some elements of new theater installations a few quarters early.

Bad plot twist. Bad, bad plot twist.

No, we're bearish!
In the "Take That" contest, kbedwards laid out the bear case for IMAX. He is concerned about the company's future viability and its lackluster financial statements. Quoting his post on the Rule Breakers board:

I simply don't believe in the long-term survivability of IMAX. I view it much like quadraphonic "stereo," laserdiscs, Betamax, and audio DVDs -- all superior formats, technically, to the existing counterparts, but for various reasons, they just never caught on with the masses.

Another example of a company trying to do more than it's capable of, expanding way beyond the scope of its core business, getting stretched too thin, and ultimately not delivering.

  • $160 million in debt -- 2005 net income was $16.6 million.
  • Growth of cash flow the past few years has been virtually nil.
  • Accounting, perhaps due to the complications of leasing, is just complex at best, and has been illegal at worst (SEC investigation).
  • Attendance at movie theaters is still in decline.
  • Not to mention the whole "Hey, please somebody buy us! We're for sale!" -- which resulted in ... nothing.

So which one is it?
"After a lumpy history, earnings are sustained, positive, and set to grow," I wrote in my original recommendation. That is no longer mostly true. Wall Street is looking for the company to earn just $0.09 a share this year. Analysts expect profits to double to $0.18 a share in 2007, but that is less than half of what IMAX earned last year.

A buyout is still possible in the single digits, but one has to wonder if suitors are simply waiting on the sidelines to see if the company does in fact implode so it can be picked up even cheaper. Prospects for the few publicly traded multiplex chains such as Regal Entertainment (NYSE:RGC) and Carmike Cinemas (NASDAQ:CKEC) remain iffy, but many seem to be carving out their own growth initiatives with or without IMAX on their side.

The community sentiment is surprisingly upbeat. According to Motley Fool CAPS data, IMAX is a three-star stock (out of five possible stars); 241 CAPS players believe the company will outperform the market in the future out of the 265 investors with an opinion on the company.

So ... which one is it? For the full bull and bear IMAX arguments, and to read the cases against each of the five finalists, click on over to Rule Breakers Central. If you're not a member, you can access the service, read all of our recommendations, and cast a vote in our contest -- all with a completely free, no-strings-attached 30-day trial.

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Longtime Fool contributor Rick Munarriz has enjoyed IMAX screenings in the past and laments that he doesn't have an IMAX theater closer to home. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. Time Warner is a Stock Advisor recommendation. The Fool has adisclosure policy.